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Money market accounts vs. money market funds

By Andrew Freiburghouse | Money Rates Columnist

Many people confuse market funds with money market accounts. But these are two very different things. Money market funds are investments in the debt of governments and major corporations. Money market accounts are more like savings accounts.

Money market funds

For years, money market funds were marketed and sold as the ultimate safe investment. And this was not a misrepresentation. Declines in the value of money market account were exceedingly rare. But then the so-called "credit crunch" grew into the Great Recession, leading some to worry that the traditionally secure realm of money market funds could be in trouble.

The reason money market funds were so historically safe is that fund managers were very careful and conservative about which debts they bought. Only the most secure debt was invested in, much of it issued by the federal government. Thus yields were low, but the money itself was safe, because the underlying debts were going to be paid back.

In recent years, however, some money market managers, in pursuit of higher returns, began to invest in riskier debt. When the credit markets deteriorated, a lot of this riskier debt was suddenly in danger of not being paid back and putting money market funds at risk. To address this problem, investment firms and the government moved to guarantee the safety of these investments. The panic subsided and investor losses were averted.

So how safe are money market funds today? Because they are investments in assets, it really depends on the quality of the assets. So long as money market fund managers maintain an aggressively conservative approach in choosing these assets, money market funds are likely to remain boring but safe investments that offer relatively low rates of return but a very low risk of loss.

Money market accounts

Money market accounts, by contrast, are deposit vehicles that are very similar to many savings accounts. The money is simply deposited in the bank and gains interest, with insurance of up to $250,000 (per depositor, per institution) in accounts backed by the FDIC. The problems in the credit market have not affected money market accounts the same way they did money market funds.

Money market accounts get their name because, as with money market funds, banks typically invest this money in safe, short-term investments. The interest rate on a money market account is related to how much money these types of investments are yielding on the "money market." If short-term investments are performing well, expect a good yield on your money market account. If they aren't, expect a lower yield. But in either case, some level of interest is guaranteed.

Money market accounts are also fairly liquid, with some even offering check-writing privileges. So if you expect to need your savings regularly, but you still want to earn some interest, a money market account may be a good choice.

For more on current money market account terms and conditions, please see MoneyRates.com's money market account listings.

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