Money Market Account vs. Money Market Fund
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Saving and investing are two dimensions of your finances that can help increase your assets and net worth. Whether saving for a holiday, building up an emergency fund or looking to buy a home, a money market account can help you grow your savings. On the other hand, a money market fund can also help you earn interest on your money.
Since the names are similar, a lot of people (including me!) get confused about the purpose they serve. Both are financial products, but they serve different purposes and vary in terms of their structure and functions. This guide explains the key differences between money market accounts and money market funds.
In this article
What is a money market account?
A money market account (MMA) is a savings account offered by financial institutions, such as banks and credit unions. It's designed to combine features of traditional savings and checking accounts while providing some of the benefits of a money market fund.
Money market accounts can be a good option for individuals who want to earn a slightly higher interest rate than a regular savings account while maintaining easy access to their funds. However, they may not offer the same potential for growth as other investment options with higher risk profiles. As with any financial decision, it's important to consider your financial goals, risk tolerance, and the terms and conditions of the account before opening a money market account.
Related: Best Money Market Accounts of 2023
Features of a money market account
A money market account (MMA) has several features that make it a popular choice for individuals looking to earn a reasonable return on their savings while maintaining liquidity. Here are some of the key features of a money market account:
Interest rates
MMAs typically offer higher interest rates compared to regular savings accounts. While the rates can vary depending on the financial institution and market conditions, they are generally more competitive.
Liquidity
Money market accounts offer a good balance between earning interest and maintaining access to your funds. You can usually withdraw and transfer from your MMA. However, there might be restrictions on the number of transactions you can perform within a given period due to federal regulations (such as Regulation D).
FDIC insurance
Money market accounts are often insured by the Federal Deposit Insurance Corporation (FDIC), up to the maximum limit allowed by law. This insurance protects your deposits against bank failures or financial instability, providing peace of mind.
Minimum balance
Some MMAs require a minimum balance to open the account and avoid monthly fees. It's important to check the specific requirements of the financial institution you're considering.
Check writing and debit card access
Many MMAs offer limited check-writing privileges and might provide a debit card linked to the account. This allows you to write checks for payments or make purchases directly from the account.
Tiered interest rates
Some money market accounts offer tiered interest rates, meaning the interest rate you earn can increase as your account balance grows. This can provide an incentive to save more money in the account.
Limited withdrawals
Due to federal regulations, money market accounts, like savings accounts, might limit the number of withdrawals or transfers you can make in a given month. This is typically done to encourage using these accounts for saving rather than frequent transactions.
Stability and safety
Money market accounts are designed to provide stability and safety for your savings. While they may not offer the same potential for growth as riskier investments, they are a reliable option for parking funds you want to keep accessible.
Easy transfers
You can typically transfer funds easily between your money market account and other accounts within the same financial institution, making it convenient to manage your finances.
It's important to note that while money market accounts offer benefits like competitive interest rates and liquidity, they might not yield as high returns as riskier investment options. Before opening a money market account, consider your financial goals, risk tolerance, and the terms and conditions offered by the financial institution to ensure that it aligns with your needs.
Better banking is here.
- No account fees
- Earn up to 4.20% APY
- Up to 2-day-early-paycheck
- No-fee Overdraft Coverage.
- Do it all in one app.
- Up to $2M of additional FDIC insurance through a network of participating banks.
What is a money market fund?
A money market fund (MMF) is an investment vehicle offered by financial institutions, typically mutual fund companies and brokerage firms. Money market funds are designed to give investors a low-risk option for investing cash while earning a small interest. They are not the same as money market accounts or savings accounts offered by banks and credit unions.
Features of money market fund
Investment strategy
Money market funds invest in a diversified portfolio of short-term, low-risk securities such as government bonds, certificates of deposit (CDs), commercial paper, and other highly liquid assets. The goal is to maintain stability in the fund's net asset value (NAV) and provide a haven for investors' funds.
Low risk
Money market funds are considered low-risk investments due to the conservative nature of their holdings. The securities they invest in are generally considered to have a low probability of default, and the fund's main objective is to preserve the capital invested.
Liquidity
Money market funds offer high liquidity, meaning investors can buy or sell shares on any business day. The value of shares is typically maintained at a constant $1 per share (known as the fund's NAV), although it's important to note that the NAV can "break the buck" and drop below $1, albeit this is rare.
Yield
Money market funds aim to generate income for investors through interest earned on their holdings. However, their conservative investment approach makes the yields generally lower than riskier investments like stocks or bonds.
No FDIC insurance
Unlike money market accounts, money market funds are not insured by the Federal Deposit Insurance Corporation (FDIC). While they are relatively safe, there is still a very small amount of risk associated with the underlying investments.
Regulations
Money market funds are subject to regulations set by the U.S. Securities and Exchange Commission (SEC) in the United States. These regulations dictate the types of securities the funds can invest in and impose certain requirements to ensure stability and transparency.
Tax considerations
The interest earned from money market funds is typically taxable as ordinary income. However, some money market funds invest in government securities that may be exempt from state and local taxes.
Variety of funds
Money market funds come in different types, such as government money market funds, prime money market funds, and tax-exempt money market funds. These categories may have slightly different investment strategies and risk profiles.
Money market funds are often used as a temporary parking place for cash investors who want to keep accessible while earning a modest return. They are particularly popular for holding funds between larger investment decisions or when investors are concerned about market volatility. However, it's important to note that while money market funds are relatively low-risk, there is still some risk associated with any investment, and the potential for returns is generally limited compared to higher-risk investments.
Better banking is here.
- No account fees
- Earn up to 4.20% APY
- Up to 2-day-early-paycheck
- No-fee Overdraft Coverage.
- Do it all in one app.
- Up to $2M of additional FDIC insurance through a network of participating banks.
Key differences
Money market accounts (MMAs) and money market funds (MMFs) are both financial products that involve the term "money market." Still, they have distinct differences in terms of providers, regulations, features, and risk profiles. Here's a comparison between money market accounts and money market funds:
Product
A money market account is a savings account, whereas a money market fund is an investment product.
Provider
MMAs are typically offered by banks and credit unions, which are traditional financial institutions that provide various banking services. On the other hand, MMFs are typically offered by mutual fund companies and brokerage firms, which specialize in investment products.
Insured by FDIC
Money market accounts are usually insured by the FDIC in the United States, providing coverage up to the maximum limit allowed by law (usually $250,000 per depositor, per institution). This insurance protects your deposits against bank failures. Unlike MMAs, money market funds are not insured by the FDIC. They are considered investments and are subject to market risks, although they are generally low-risk due to their conservative investment approach.
Interest rates
MMAs offer competitive interest rates compared to regular savings accounts but generally provide lower yields than money market funds or riskier investments. The interest rates are based on the funds rate. Money market funds aim to provide competitive yields by investing in short-term, low-risk securities. Yields can vary based on the fund's investments and market conditions.
Liquidity
While money market accounts offer liquidity, there might be limitations on the number of withdrawals or transfers you can make within a specific period due to federal regulations. MMFs offer high liquidity, allowing investors to buy or sell shares on any business day. The value of shares is typically maintained at a constant price (e.g., $1 per share), but there is a small possibility of the net asset value (NAV) "breaking the buck" and falling below $1.
Minimum balance
Some MMAs require a minimum balance to open and maintain the account. Falling below this balance might result in fees or a reduction in the interest rate. There is no such balance requirement with MMFs.
Check writing and debit cards
Many MMAs offer limited check-writing and debit card access, making it easier to perform transactions and payments directly from the account, while MMFs have no such features.
Diversification
Money market funds invest in a diversified portfolio of short-term securities, which helps spread risk across different assets and issuers. Money market accounts do not offer diversification to your portfolio.
Professional management
MMFs are managed by professional investment managers who decide based on the fund's objectives and market conditions. MMAs are simply accounts offered by banks or credit unions.
In summary, money market accounts are more like traditional savings accounts offered by banks and credit unions. In contrast, money market funds are investment vehicles offered by mutual fund companies and brokerage firms. Each has its own set of features, risk considerations, and purposes, so it's important to understand the differences when deciding between the two.
FAQs
Are money market accounts taxable?
You will have to pay taxes on the money you earn in a money market account and a money market fund.
What is the difference between a money market fund and mutual fund?
A money market fund is a type of mutual fund which invests the money into low-risk securities. There are several types of mutual funds available in the market and money market fund is an example of the same.
When should you invest in money market funds?
Money market funds are ideal for short-term goals. They have high interest rates as compared to a traditional savings account and the funds can be easily accessed whenever you need to.
Better banking is here.
- No account fees
- Earn up to 4.20% APY
- Up to 2-day-early-paycheck
- No-fee Overdraft Coverage.
- Do it all in one app.
- Up to $2M of additional FDIC insurance through a network of participating banks.
The bottom line
In short, money market accounts and funds are suitable if you’re seeking short-term, stable, liquid places to save money. An MMA might be ideal for a saver who wants their funds to have FDIC or NCUA insurance and wants the straightforward simplicity of a savings account with potentially more interest. An MMF might be a better option for someone comfortable with a mutual fund’s risks and rewards or someone in a higher tax bracket who wants tax-advantaged returns.
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