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Money market funds vs. money market accounts

mmf_v_mmaMany people confuse money market funds with money market accounts, but they are two very different things. Money market funds are investments in the short-term debt of governments and major corporations. Money market accounts are more like savings accounts.

It is important to understand each investment to know which is appropriate for your situation and goals. The information below can help you decide if one of them is right for you.

What is a money market fund?

According to Richard Barrington, MoneyRates.com senior financial analyst, "Money market funds get their name from commercial money markets, which are exchanges where corporate treasurers buy and sell huge amounts of commercial paper to manage their cash flow."

Money market funds are classified as a type of mutual fund with a price that, theoretically, can fluctuate. (With a few exceptions, money funds have been able to maintain their stable $1 net asset value.) They are subject to guidelines set by the Securities and Exchange Commission (SEC) and can be purchased from mutual fund companies or brokerage firms.

Are money market funds safe?

For years, money market funds (MMFs) were marketed and sold as the ultimate safe investment -- and this was not a misrepresentation. Declines in the value of money market funds have happened but were exceedingly rare.

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

Is a money market fund right for you?

Money market funds are typically used by individual investors that have cash in a brokerage account waiting to be reinvested. Shares are purchased to buy into a money market fund, and they can be sold at any time without restriction. While their cash is parked in an MMF, it usually earns a moderate return and can be easily accessed if necessary. Many funds offer check-writing capability and same-day settlement.


For an in-depth understanding of money market funds, read: Money market funds: How they work


What is a money market account?

A money market account, on the other hand, is a deposit vehicle very similar to a regular savings account. Money deposited in a money market account (MMA) gains interest and the funds are fairly accessible. Like a savings account, depositors are limited to six withdrawals a month from a money market account. Some MMAs offer debit cards or checks but may also require a high minimum balance.

Are money market accounts safe?

Banks and credit unions are permitted to invest money market account deposits in short-term securities like certificates of deposit (CDs), treasury notes and commercial paper, which may translate to higher rates than a traditional savings account at times. These securities may slightly increase risk for depositors; but this may be less of a concern since MMAs are offered by financial institutions which are often protected by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000 per account holder.

Is a money market account right for you?

Money market accounts are often seen as a savings account with check-writing ability. This makes it an effective emergency fund account which earns the highest interest rate available until the funds are needed.

Money market funds vs. money market accounts - feature summary

Feature

Money Market Fund

Money Market Account

Purpose of account

House cash in between investment opportunities

Emergency fund or other savings where you'd like to withdraw funds with a check or debit card

How to invest

Purchase shares at a mutual fund company or investment broker

Deposit funds at a bank or credit union

Access to funds

Same-day settlement is common, no timing restrictions

Immediate access, but limited to six withdrawals per statement cycle

Insurance coverage

None

Up to $250,000 per depositor through the FDIC or NCUA

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