Q: How are money market accounts different from money market funds? Do I risk losing my money in either?
A: This is an excellent question, because from the names you would expect that money market accounts and money market funds were almost interchangeable. They are not -- there are important differences that can affect what you earn and how secure your money is.
Money market accounts are deposit accounts offered by banks. Money market funds are a type of mutual fund. In either case, the interest rate is earned by investing in what are known as the money markets -- essentially, short-term debt obligations. However, there are three important differences in the two vehicles:
- Money market accounts draw from a broader pool of resources. While money market accounts are general obligations of a bank, money market funds rely on a specific portfolio of investments. If those investments go sour, the company operating the fund is not obligated to make up for any losses.
- Money market funds pool your money with that of other investors. This means that as money flows in, returns can be diluted. As money flows out, sales can be forced at inopportune times. In the normal course of business, this isn't much of an issue, but when cash flows are heavy, it can have a material impact.
- Money market funds are not FDIC-insured. For this protection, you'll want a money market account from an FDIC-member bank.
For most uses, the advantages line up on the side of money market accounts, so shop MoneyRates.com to compare rates and other terms offered on money market accounts.
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