Money market account vs. Money market funds: differences
A money market account and a money market fund may have similar names and serve similar purposes, but it is important to understand that these two financial products have important distinctions and nuances.
- Money Market Account: Money market accounts, also known as money market deposit accounts, are liquid bank accounts insured by the federal government. They pay interest on your deposit, but your potential for interest earnings varies depending on your bank. The most profitable money market accounts currently pay more than 0.5% interest, while the average bank only pays 0.06%.
- Money Market Fund: Money market funds, also known as money market mutual funds, are not insured by the federal government. However, these are still relatively safe liquid investments. Instead of paying a fixed interest rate, returns come from the underlying investments held in the fund, less the expenses necessary to manage it. Because money market funds largely fish in the same pool of investments, there isn’t the disparity – or outliers – in returns you see on money market deposit accounts. It is also important to note that money market funds regularly track what can be earned in a high yield money market account.
What is a money market account?
Money market accounts work much like a savings account, and many of them come with tools you’d associate with a checking account, such as a debit card and drafting abilities. checks. You deposit money and it is always easily accessible.
However, there are transaction limits. You are generally limited to six withdrawals per billing statement period. If you exceed this limit, you can pay a fee, although during the pandemic many banks suspended these fees. As the world slowly returns to normal, be sure to keep an eye out for the return of this fee structure to avoid unnecessary fees.
Are Money Market Accounts Safe?
If you are concerned about the safety of your money in a money market account, you can put those concerns aside. As long as the bank or credit union where you deposit your money is part of the FDIC or NCUA network, you are guaranteed insurance coverage of up to $ 250,000 in the event of default. ‘Financial institution.
When to consider a money market account
A money market account is a particularly good option for your emergency fund because it keeps it safe and accessible. For example, if you have an unexpected expense of $ 1,000 for an auto or emergency repair bill, you can transfer the funds from your money market account to your checking account to pay the bill.
What is a money market fund?
Money market funds have been around since the 1970s, but they have changed a lot since their inception. Today they vary depending on the type of investment allocated to the fund money. Some invest primarily in US Treasury securities and some invest primarily in corporate and bank debt securities.
There are also tax-exempt money market funds, which invest at least 80% of their portfolios in municipal securities. In fact, in some cases you may be able to invest in a money market fund designed to invest in government securities. While all of these options distinguish money market funds from money market accounts, they come with the same withdrawal limitations: no more than six per month. According to the SEC, there are currently around $ 3 trillion collectively in money market funds.
Are money market funds safe?
Money market funds are investments, and all investments carry some degree of risk. Money market funds aim to maintain a price of $ 1 per share, and even in the most tumultuous market environments – like the 2008 financial crisis and the pandemic-induced selloff of 2020 – nearly all of them do. However, there are occasional funds that “break the buck” and return investors 95 cents or 99 cents for every dollar invested. The big brokerage houses and mutual fund companies would go out of their way to preserve the net asset value of $ 1 because their reputations are at huge risk if they don’t. Keep in mind, though: there’s no guarantee of this $ 1 brand.
Despite the remote possibility of any loss, it’s also important to note that money market funds represent some of the most conservative investments available. After the financial crisis of 2007 and 2008, the government put in place new rules to limit the risks of money market funds and make these risks even more distant. With a money market fund, you can be sure that you don’t face sudden volatility and lose a lot of your money.
When to consider a money market fund
A money market fund is best for a brokerage or investment account where you have money that can be invested at any time. Think of it as an opportunity fund: If there is a downturn in the market or you find an attractive investment option, a money market fund gives you the ability to act quickly.
Differences between money market accounts and money market funds
|Money market account||Money market funds|
|Comes with federal deposit insurance protection||Safe, but not insured against loss|
|Has a stated interest rate, which varies among banks and credit unions||Will be invested in a variety of low-risk, short-term securities such as US Treasuries, corporate and municipal securities|
|Ideal for emergency funds and short-term savings goals like vacations, weddings, and down payments||Ideal for a brokerage account with a practical ability to make quick investment decisions|