If you have a lump sum of cash in a checking or traditional savings account, you could be missing out on higher interest rates.
Putting your money in a money market account or investing in a money market fund can be a low-risk way to get more out of your money and hedge against inflation. However, although they have very similar names, they are very different from money market funds.
In this analysis of money market accounts versus money market funds, you’ll learn how these savings instruments differ in terms of returns, account minimums, benefits, and risks.
What is a money market account?
A is a type of deposit account available from many banks and credit unions. They usually pay a higher interest rate than usual. Here’s a look at the average rates on these community deposit accounts as of March 2024, according to the FDIC:
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Unlike savings accounts, money market accounts give you the right to write checks, so you can use your account occasionally to pay bills or transfer money. They can also come with a bank card.
As deposit accounts, money market accounts opened at federally insured banks or credit unions are protected from bank closures. Your deposits are covered by (FDIC) coverage or the (NCUSIF).
What is a money market fund?
Although the names are similar, money market funds are quite different from money market accounts. Money market funds are not deposit accounts; it is a type of mutual fund, an investment fund that pools money from multiple investors to invest in a basket of securities, such as shares or bonds.
Money market funds invest in short-term liquid securities, such as commercial paper (unsecured corporate debt) or (CDs). To invest in a money market fund, you must have a qualifying investment account with an investment firm or online broker.
Money market funds are generally lower risk investments than other mutual funds, and are typically used to store cash or as an alternative to traditional stocks. As a mutual fund, money market funds can provide higher returns than money market accounts, but that’s true
entail more risk.
As a type of investment, money market funds are protected by Securities Investor Protection Corporation (SIPC), a government company that protects investors who have money with financially troubled brokers. SIPC protects up to $500,000 ($250,000 maximum for cash).
Money Market Account vs. Money Market Fund: Key Differences
When deciding between money market funds and money market accounts, understanding the key factors that distinguish these funds can help you decide what to do with your excess cash:
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Availability: Money market accounts can be opened through a bank or credit union, while money market funds are only available through investment firms. To invest in a money market fund, you will need a brokerage or retirement account.
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Insurance: Money market accounts are covered by FDIC or NCUSIF insurance, but money market funds are not. Money market funds are investments, not bank accounts, and are therefore protected by SIPC.
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Returns: In general, money market funds have higher returns than the APYs on money market accounts.
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Initial investment: Money market accounts generally require larger initial deposits than money market funds. While you can often invest around $2,000 in a money market fund, money market accounts often require $6,000 or more to earn the highest advertised interest and/or avoid fees.
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Risk: With a money market account, interest rates may fluctuate, but your account will not lose value. In contrast, money market funds involve some risk; you can lose money if market conditions change.
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Cost: Money market accounts typically have monthly fees, which you can waive if you meet certain balance requirements. Money market funds involve expense ratios, which are a percentage of invested assets that go toward the investment firm’s administrative and management costs.
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Taxes: Some money market funds are tax exempt, such as funds consisting of municipal bonds. But the interest you earn on a money market account is taxable as income.
Frequently Asked Questions
Is a money market fund better than a money market account?
Whether a money market fund is better than a money market account depends on your goals and risk tolerance. Money market funds are relatively low-risk investments, but there is a risk that you will lose money. However, they typically offer higher returns than money market accounts and typically have lower account minimums.
If you can’t bear to take any risk, a money market account can be a good alternative. You’ll earn a higher APY than a traditional savings account, without the risk of market changes affecting the value of your account.
What are the disadvantages of money market funds?
Money market funds typically offer higher returns than deposit accounts, but there are some drawbacks to consider:
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Risk: Money market funds can lose money if the underlying securities in the fund decline in value.
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High investment minimums: Unlike , which can often be opened with as little as $5, money market funds have higher investment minimums. Typically, you need at least $2,000 to invest in a money market fund.
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Cost: Money market funds involve expense ratios, which range from 0.10% to 0.76% of your invested assets. Depending on your balance, the costs can be significant.
Is it good to keep money in a money market account?
Money market accounts can be useful account options if you have excess cash that you need for a short-term goal, such as an upcoming major purchase or a dream vacation. Money market accounts typically have higher APYs than savings accounts and come with the ability to write checks and/or a debit card.
