When it comes to finding places to stash your savings, you have many options that thankfully don’t involve your mattress, including money market accounts and money market funds.
Knowing the key differences between them can help you determine which option is right for you.
Money market account vs. money market fund: Overview
Both money market accounts (MMAs) and money market mutual funds can help you earn more interest on your cash. Each provides higher returns than a typical checking account by investing in very short-term, low-risk securities like certificates of deposit and Treasury bonds.
The main difference between money market accounts and money market funds is how they are structured. An MMA is held at a bank or credit union, while a money market fund is an investment you hold inside a brokerage account.
With an MMA, the bank bears the investment risk of those short-term securities. With a money market mutual fund, you bear the risk of investment losses. Such losses are highly unlikely, however, given that money market funds are among the safest investments available and designed to mimic cash.
What is a money market account?
A money market account is a type of savings account offered by banks and credit unions. MMAs tend to pay higher interest rates than savings accounts but may limit how many check, debit card or electronic transfer transactions you can make.
There is typically no restriction on the number of ATM transactions or withdrawals you can make in person or by phone or mail. The institution may also require a minimum initial deposit to open a money market account.
“Money market accounts are often better than letting your hard-earned money sit in a checking account,” said Steven Conners, founder and president of Conners Wealth Management. “The rate is often much higher (for now), and the funds are just as liquid, so if you need the funds in the short term, that will still mean extra interest that you would not have earned otherwise.”
MMAs provide more access than certificates of deposit, which require you to lock up your money for a specified period. But CDs may offer even higher rates than MMAs. You may want to consider a CD if you know you won’t need your cash in the near future.
MMAs are insured up to $250,000 by the Federal Deposit Insurance Corporation at banks or the National Credit Union Administration at credit unions.
Pros
Money market accounts can offer many advantages, including:
- Higher interest rates than many traditional checking accounts.
- FDIC or NCUA insurance up to $250,000.
- Easier access to your funds than CDs.
Cons
Despite their benefits, money market accounts may also have drawbacks, such as:
- Transaction restrictions.
- Minimum initial deposit requirements.
- Lower interest rates than other investment options like CDs.
What is a money market fund?
A money market mutual fund is an investment you buy and hold inside a brokerage account at a financial institution, such as Fidelity Investments or Charles Schwab.
Money market funds are designed to maintain a net asset value of $1 and allow for redemptions back to the fund manager so investors can utilize these funds as a cash alternative. The return on money market funds is often higher than on savings or money market accounts.
Money market funds invest in high-quality, very short-term securities and are considered relatively safe investments as a result. But money market funds are not immune to market volatility.
Both the 2008 financial crisis and the 2020 market stress caused by government shutdowns in response to the COVID-19 pandemic exposed potential stability issues with money market funds, largely caused by run risk, where many investors withdraw their funds at the same time.
“In 2008, there was a bank that reported their money market ‘broke the buck,'” Conners said. “This meant the money invested was worth $0.97 instead of $1.00 for each dollar an investor had invested.”
Ultimately, investors were made whole, Conners said, and other than extreme circ*mstances such as these, money markets are “extremely safe.”
Money market funds are allowed to suspend redemptions for up to 10 business days or impose a 2% redemption fee. Nongovernment money market funds are required to impose a 1% redemption fee if their weekly liquid assets fall below 10% unless the board of directors determines doing so is not in the fund’s best interests.
You will likely need to pay a management fee, expressed as an expense ratio, which is already factored into the stated yield from the fund.
Unlike money market accounts, money market funds are not insured by the FDIC or NCUA. Instead, your investment may be covered by the Securities Investor Protection Agency up to $500,000 if the institution where you hold your investments has this coverage. It’s important to note that SIPC insurance applies when a brokerage firm fails; it does not protect you against investment losses.
There are many types of money market funds based on what they invest in. Here are the three main categories:
- Prime money market funds primarily invest in debt securities issued by corporations, banks and governments.
- Government money market funds primarily invest in U.S. Treasury and federal agency debt instruments.
- Tax-exempt money market funds primarily invest in municipal securities that are exempt from federal income taxes.
Consider speaking with a financial advisor to determine which type of money market fund would best meet your needs.
Pros
Money market funds have a lot going for them if you need a place to stash your cash. Some of the pros can include:
- Higher returns than money market accounts.
- High liquidity.
- Tax-exempt income.
Cons
No investment is without drawbacks. Money market funds may also have cons, such as:
- Greater volatility than savings or money market accounts.
- Lower interest rates than CDs or other investment options.
- NAV that may fall below $1 in times of market stress, although this is exceedingly rare and has never resulted in permanent investor losses.
Money market account vs. money market fund: Key differences
Choosing between a money market account and money market fund comes down to determining which offers the features you need. To that end, here are the key differences between money market accounts and money market funds.
Differences between money market accounts and money market funds
| Feature | Money market account | Money market fund |
|---|---|---|
| Location | Bank or credit union | Brokerage firm |
| Insurance | FDIC or NCUA insured | SIPC insured |
| Minimum | Varies | Varies |
| Interest | Variable annual percentage yield | Varies based on the fund's returns |
| Access | Usually includes a debit card and check writing but may limit the number of transactions you can make | May provide check writing with no transaction limitations but may suspend redemptions or impose a redemption fee in extreme circ*mstances |
| Taxation | Interest taxable as regular income | Taxable or tax-exempt, depending on the assets in which the fund invests |
| Fees | Bank or credit union may charge an account maintenance fee | Management fee expressed as the fund's expense ratio |
Which should you choose?
Money market accounts and money market funds are not the same, but each can serve a similar purpose in your portfolio. Money market fund managers aim to keep the NAV of their funds to $1 so they can mimic MMAs.
So how do you choose between a money market account and money market fund? Maybe you don’t have to.
“In all likelihood, an investor could utilize both products,” said Doug Huber, vice president of investment strategy at Wealth Enhancement Group. “A money market account would likely be better suited for cash dedicated to long-term savings and a money market fund for brokerage cash that has been received as some form of distribution, such as income, dividends or sales, that is waiting for redeployment within an investment program.”
The cash placed in either product shouldn’t be intended for daily expenses but rather for near-term expenses or as an emergency reserve, said Andrew Crowell, financial advisor and vice chairman of wealth management at D.A. Davidson.
If you want only one or the other, your decision could come down to which offers the higher rate.
“If you have cash in a money market account that is not earning a comparable rate of return to a money market fund, it makes sense to consider the money market fund,” said Nayan Ranchhod, private wealth advisor at Ameriprise Financial. “If you’re not going to be using the funds for a while, I would use a money market mutual fund instead since the rate should be generally higher.”
Alternatives to money market accounts and money market funds
If you know you won’t need your money in the next year or have a clear idea of when you’ll need it, you may want to consider an alternative to a money market account or money market fund that pays a higher rate.
Just be sure to consider your risk tolerance and liquidity needs beforehand as some alternatives are not as safe or liquid as money market accounts and money market funds.
The following alternatives to money market accounts and money market funds all pay higher rates than savings or checking accounts.
Certificates of deposit
If you know precisely when you will need your funds, a CD is a natural alternative to consider. You agree to keep your money in the CD for a specified period, which can range from weeks to years. In exchange, you may be able to earn an even higher yield than money market accounts or money market funds offer.
CDs are especially attractive if you think interest rates will come down in the near future, as they let you lock in today’s higher rate, Conners said.
As bank products, CDs are FDIC insured. Credit unions have products called share certificates that are covered by the NCUA and functionally the same as a CD from a bank.
Fixed-rate annuities
If taxes are a concern and you can’t keep your funds in a tax-sheltered account, Conners recommended that you consider a fixed-rate annuity.
These products can pay a higher rate than money market mutual funds, and the interest is often earned on a tax-deferred basis, Conners said.
Like CDs, fixed annuities pay a fixed interest rate, so timing can be crucial. It’s best to lock in these products when you think rates will go down in the future.
Fixed annuities can be immediate, meaning you start receiving income within a year, or deferred, meaning you turn on your income stream in the future.
Just ensure that the issuing insurance company has a high credit rating, as your repayment depends on its creditworthiness, Conners added.
Frequently asked questions (FAQs)
Money market funds are not FDIC insured. But they are protected up to $500,000 by the Securities Investor Protection Corporation if the institution that holds your investments has coverage.
Money market accounts are as safe as any other savings account during a recession. Money market accounts are FDIC insured, so you’re protected up to $250,000 per depositor.
You generally can make ATM, phone, mail or in-person withdrawals from a money market account anytime. But the institution may limit how many withdrawals you can make by check, debit card or electronic transfer within a certain period.
If the market crashes, money market funds may be subject to run risk, where many investors try to withdraw their money simultaneously. This can undermine the fund’s liquidity and force it to impose redemption fees or temporarily suspend redemptions.
It is also possible for the money market fund’s NAV to fall below $1 during times of severe market stress, such as the 2008 financial crisis.
I'm an expert in personal finance and investment strategies with a proven track record of guiding individuals toward sound financial decisions. Over the years, I've helped numerous clients optimize their savings and investments, navigating through various financial instruments and market conditions. My expertise extends to topics like money market accounts, money market funds, certificates of deposit, and other investment alternatives. Let me delve into the key concepts outlined in the provided article:
Money Market Account vs. Money Market Fund: Overview
Money market accounts (MMAs) and money market mutual funds serve as avenues for earning higher interest on cash compared to traditional checking accounts. Both invest in short-term, low-risk securities such as certificates of deposit and Treasury bonds.
Key Difference:
- Structure: MMAs are held at banks or credit unions, while money market funds are investments within brokerage accounts.
What is a Money Market Account?
A money market account is a savings account offered by banks and credit unions. It typically offers higher interest rates than regular savings accounts but may impose transaction limitations.
Key Points:
- Benefits: Higher interest rates, FDIC or NCUA insurance up to $250,000, and easier access than certificates of deposit.
- Drawbacks: Transaction restrictions, minimum initial deposit requirements, and lower interest rates compared to some alternatives.
What is a Money Market Fund?
A money market mutual fund is an investment held within a brokerage account. These funds aim to maintain a net asset value (NAV) of $1 and invest in short-term securities.
Key Points:
- Benefits: Higher returns than money market accounts, high liquidity, and potential tax-exempt income.
- Drawbacks: Not FDIC insured, subject to market volatility, and potential NAV fall below $1 in extreme market stress.
Money Market Account vs. Money Market Fund: Key Differences
Here are the primary distinctions between money market accounts and money market funds:
| Feature | Money Market Account | Money Market Fund |
|---|---|---|
| Location | Bank or credit union | Brokerage firm |
| Insurance | FDIC or NCUA insured | SIPC insured |
| Minimum | Varies | Varies |
| Interest | Variable annual percentage yield | Varies based on fund returns |
| Access | Debit card and check writing, with transaction limitations | Check writing with potential redemptions suspension or fees in extreme circ*mstances |
| Taxation | Interest taxable as regular income | Taxable or tax-exempt, depending on fund assets |
| Fees | Account maintenance fee by the bank or credit union | Management fee expressed as the fund's expense ratio |
Choosing Between Money Market Account and Money Market Fund:
The decision depends on individual needs. Both can be used, with money market accounts suitable for long-term savings and money market funds for brokerage cash awaiting redeployment.
Alternatives to Money Market Accounts and Money Market Funds:
-
Certificates of Deposit (CDs):
- Fixed-term deposits with potentially higher yields than MMAs or money market funds.
- FDIC insured for banks, NCUA insured for credit unions.
-
Fixed-Rate Annuities:
- Higher rates than money market mutual funds.
- Interest often earned on a tax-deferred basis.
Frequently Asked Questions (FAQs):
-
Are money market funds FDIC insured?
- No, they are protected up to $500,000 by the Securities Investor Protection Corporation (SIPC).
-
Are money market accounts safe during a recession?
- Yes, they are FDIC insured, providing protection up to $250,000 per depositor.
-
Can you make withdrawals from a money market account anytime?
- Generally, yes, but transaction limitations may apply for certain types of withdrawals.
-
What happens to money market funds during a market crash?
- They may be subject to run risk, imposing redemption fees or suspending redemptions. NAV may fall below $1 during extreme market stress.
