Q: I'm looking for a good money market fund. My main concern is safety, but I also want the best interest rate I can get. What kind of a rate should I expect to find?
A: Probably the most important thing you should do for starters is distinguish whether you are looking for a money market fund, or a money market bank account. The name difference may be subtle, but the difference in the nature of these vehicles could make all the difference -- especially since you are primarily concerned with safety.
A money market bank account is a form of savings account offered by banks. These pay a variable interest rate, allow you a reasonable amount of access to your money (though they are not designed to be used for frequent transactions like a checking account), and most importantly, are covered by deposit insurance as long as you bank with an FDIC-insured institution. Therefore, their most prominent characteristics these days are safety and liquidity, because unfortunately they don't offer much in the way of yield given the current low-rate environment.
According to the FDIC, money market rates were averaging 0.09 percent as of the end of October, though the most recent America's Best Rates survey by MoneyRates.com found the top money market accounts offering roughly 10 times that much. So, you can get close to 1 percent if you shop around.
In contrast, money market funds are not bank accounts. They are essentially mutual funds that invest in very short-term securities. Like money market bank accounts, money market funds have been greatly affected by the low-rate environment, so you are likely to find most yields well under 1 percent.
Perhaps the most significant difference between money market funds and their banking namesakes is that money market funds are not covered by FDIC deposit insurance. So, while they are designed to offer liquidity and stable values, this may not be the case under extremely adverse investment circumstances -- an issue that came up during the 2008/2009 financial crisis.
Since that financial crisis, there have been various attempts to reform money market funds. Most of the proposals involve letting their valuations fluctuate and restricting withdrawals during periods of heavy outflows. While these proposals are designed to make the funds less prone to total collapse, changes of this nature would diminish the stability and liquidity people typically want from this kind of vehicle in the first place. Between a change in SEC heads and frantic lobbying by the mutual fund industry, this reform movement has changed direction several times.
In short, while the future of money market funds is still uncertain, money market bank accounts represent much more of a sure thing.
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