Although money market accounts and money market funds have similar names and serve similar purposes, it is important to understand that there are some important differences and nuances between these two financial products.
What is a money market account?
A money market account, also known as a money market deposit account, is a highly liquid bank account that is insured by the federal government. You will be paid interest on your deposit, but the potential for earning interest will vary from bank to bank. The highest-yielding accounts in the money market currently pay more than 5% APY, while the average bank pays just 0.61% for a savings account.
How do money market accounts work?
Money market accounts function similarly to savings accounts, and many come with tools related to checking accounts, such as debit cards and check-writing capabilities. Once you deposit your money, you can easily access it at any time.
However, there are trading restrictions. Generally, you are limited to six withdrawals per billing statement period. If you exceed that limit, you may be subject to fees. Many banks have suspended these fees during the pandemic, but now that business is almost back to normal, check to see if they return to these fee structures to avoid unnecessary fees . Interest earned on these accounts is also taxable.
Are money market accounts safe?
If you’re worried about the safety of your cash in your money market account, your worries will be put to rest. If the bank or credit union where you keep your money is a member of the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) network, your financial institution is insured for up to $250,000, if applicable. Fail.
What is a money market fund?
Money market funds have been around since the 1970s, but they have evolved considerably since their inception. Currently, they vary depending on the type of investments allocated to the funds’ funds. Some invest primarily in U.S. Treasury securities, while others invest primarily in corporate and bank bonds.
How do money market funds work?
Money market funds (also known as money market mutual funds) are not federally insured. However, these are still relatively safe liquidity investments. Instead of paying a set interest rate, you earn a return on the underlying assets held in the fund minus operating expenses. You also don’t have access to your funds like you can with a money market account. Instead, you must initiate the transfer from your brokerage account, and it may take more than one business day for the funds to post to your account.
Because money market funds primarily fish from the same investment pond, there are no return disparities or outliers that exist in money market savings accounts. It’s also important to note that money market funds always lag the returns earned in the highest-yielding money market accounts. And in some cases, if your account falls below a certain limit, you’ll typically end up paying taxes on your earnings, as well as maintenance fees.
There are also tax-exempt money market funds that invest at least 80% of their portfolio in municipal securities. In fact, in some cases, you may be able to purchase shares in a money market fund that invests in securities in your state.
A total of approximately $6.3 trillion was invested in money market funds as of September 2024, according to the Investment Company Institute.
Are money market funds safe?
Money market funds are investments, and all investments involve a degree of risk. Money market funds aim to maintain a price of $1 per share, and nearly all did so even in the most turbulent market environments, including the 2008 financial crisis and the 2020 pandemic crash.
However, from time to time there are “pay-for-you” funds that return investors 95 or 99 cents on every dollar invested. Major securities companies and investment trust companies work extremely hard to maintain the net asset value of $1. Failure to do so poses significant risks to your reputation. However, please note that we do not guarantee that $1.
It’s also important to keep in mind that money market funds are some of the most conservative investments, although the potential for loss is slim. After the financial crisis of 2007 and 2008, the government introduced new rules to limit the risk of money market funds and further distance them from distant risks. With a money market fund, you can rest assured that you won’t lose a lot of money in the event of sudden fluctuations.
Difference between money market account and money market fund
money market account
- It is opened at a bank or credit union.
- Protected by Federal Deposit Insurance.
- Funds carry a stated interest rate, which varies by bank and credit union.
- There are often transaction limits, typically six per month.
- Perfect for holding an emergency fund or for short-term savings goals.
money market funds
- Opened as a securities company.
- Although it is safe, there is no guarantee against loss.
- Funds are invested in a variety of low-risk short-term securities that fluctuate in value.
- There are no restrictions on withdrawals and transfers.
- Ideal for brokerage accounts with useful features to help you make investment decisions quickly.
- You can typically earn higher interest rates than money market accounts.
Which is better: a money market account or a money market fund?
Money market accounts are a particularly attractive option for emergency funds because they stay safe and accessible. For example, if you have a $1,000 unplanned expense for a car repair or emergency room bill, you can pay the expense directly from your money market account or transfer funds from your money market account to your checking account to pay the bill. You can.
Because of their combination of liquidity and earning potential, money market accounts can also be a good option for saving for short-term goals like vacations, weddings, or down payments.
However, if you have the money to invest right away, a money market fund may be a better option to start with. Think of this as an opportunity fund. If there is a market decline or you find an attractive investment option, money market funds allow you to act quickly.
conclusion
For those who want the security of federal insurance and a fixed, if fluctuating, interest rate, a money market account can be an ideal choice, especially for an emergency fund. Money market funds are ideal for people who want to take advantage of market opportunities, although their investment orientation means they carry a little more risk.
Understanding these nuances is key to making informed choices for your specific financial situation. After comparing the two types of accounts, you may also want to compare options from different banks, credit unions, and brokerages. This is because the rates and benefits offered may vary.
–Freelance writer Alison Martin Contributed to updating this article.
