Is a money market fund considered risk-free in terms of credit risk?

A money market fund is not considered completely free from credit risk because it invests in short-term debt instruments, such as commercial paper, Treasury bills, and certificates of deposit, which can carry varying levels of credit risk depending on the issuer's financial health. While money market funds typically invest in high-quality, short-term investments and strive to maintain a stable net asset value (NAV), there is always the potential for default, particularly during economic downturns or if an issuer faces financial difficulties.

This inherent risk is why it is categorized as carrying some degree of credit risk. Even though money market funds aim to minimize risk and are generally safer compared to other mutual funds, investors should understand that complete credit risk elimination is not achievable. Understanding this nuance helps investors make informed decisions regarding their investment options and expectations regarding safety.