Money Market Account Vs. Money Market Fund
A money market account vs. money market fund comparison involves evaluating distinct features and functionalities of these two investment tools. A money market account, as opposed to a money market fund, is typically offered by banks and credit unions, providing a secure avenue for depositors to earn interest on their funds while maintaining liquidity.
Jan 25, 2024
Money market account vs. money market fundpresents a nuanced choice between two financial instruments with distinct features. A money market account mirrors a hybrid between savings and checking accounts, offering interest, accessibility, and FDIC or NCUA protection.
Conversely, a money market fund involves investing in short-term, low-risk assets, potentially yielding higher interest but lacking FDIC insurance. As we delve into the differences and considerations, individuals must weigh factors like liquidity, taxation, and risk tolerance to determine which aligns better with their financial goals.
Money market accounts work like savings accounts, and many of them come with features you'd expect from a checking account, like the ability to write checks and use a debit card. When you put money, it's always easy to get to.
The number of transactions is limited, though. Most of the time, you can only make six withdrawals during a payment statement period. You might have to pay a fee if you go over that amount.
During the outbreak, many banks stopped charging those fees. Now that business is mostly back to normal, check to see if those fees are being charged again to avoid any extra charges.
You can put money into a money market mutual fund. This kind of mutual fund puts its money into money market securities that are very liquid and have low risk. These securities include short-term Treasury securities and loan instruments from companies and banks.
There are times when a money market fund might buy municipal stocks that offer tax breaks. You can get these accounts from Vanguard, Fidelity, Charles Schwab, and other brokers and financial firms. There isn't much danger with a money market account, but it's not insured either.
Money market accounts, which can be opened at banks and credit unions, have several appealing benefits for customers:
- Interest- It's like a savings account, but with money market accounts, you earn interest.
- Access - With a money market account, you can get a debit card and write checks. It has some of the benefits of a bank account and earns interest like a savings account.
- Insurance - A money market account is protected by the FDIC (Federal Deposit Insurance Corporation) or the NCUA (National Credit Union Association) up to $250,000 per depositor per ownership group. This is the same as a checking or savings account.
People may like money market accounts because they give them more access to cash and make interest than savings accounts.
A money market fund works the same way as other mutual funds: it holds a "basket" of assets that make or lose money for shareholders.
To get steady gains instead of fast growth, money market funds often hold securities such as U.S. Treasury bonds, corporate bonds, and other short-term, low-risk assets. This is how money market funds and money market accounts are different:
- Interest- Money market funds make more interest than money market or savings accounts.
- Access- Investors can't use bank cards or write checks to access their money like they can with a money market account.
- Insurance - There is no FDIC or NCUA insurance on money market funds because they are investmentsand can lose value. The money you put in could go down in value.
The price per share of a money market fund, which is also known as the net asset value (NAV), is kept as close to $1 as possible by the fund managers. Although it doesn't happen often, a money market fund has lost investor money (this is called "breaking the buck").
It happened in 2008 during the financial crisis. The Primary Fund could only pay owners 97 cents for every dollar they put in at that time.
One big difference between money market accounts and money market funds is how easy they are to get to, how they are taxed, how much they cost, and the risks that come with them. Let us discover these differences in more depth.
Since money market funds have to be bought and sold like any other mutual fund, you might not be able to get to your money as often as you could with a money market account.
If you don't have a cash management or checking account with your investment company, you may have to wait until the next working day to withdraw your money. You'll also have to move the money from your brokerage account to your bank.
Having money in a money market account, on the other hand, means you can get it right away. You might be given an ATM card that lets you take money out of your MMA whenever you want, even on holidays and weekends. You could write checks with your MMA, which you can't do with an MMF.
When you make money in a money market account or fund, you'll almost always have to pay taxes on it. But if you put your money into a local money market mutual fund, you might not have to pay federal taxes.
If you put your money into an MMF for your home state, you might not have to pay state taxes either. How much tax the fund has to pay varies on what kinds of securities it buys. As an example, a lot of local MMFs may not have to pay taxes.
If your money market account balance drops below a certain amount, you might have to pay a fee to keep it open. But if you shop around, you can lower or get rid of upkeep fees.
A money market fund, on the other hand, usually charges management fees based on a cost ratio, which is a percentage. This rate could be anywhere from 0.08% to 0.40%. You have to pay this fee no matter how much money you put into the fund.
- Interest-bearing - You may get better interest rates on your cash amount in a money market account than in a similar checking or savings account.
- FDIC protection- If you open a money market account at an FDIC-insured bank, you can only lose up to $250,000 per depositor per account type. Your money is safe here, so don't worry about it.
- Ability to spend from a savings account- You can spend money from a money market account while still getting a good return on your money.
- Limited withdrawals- You can spend money from a money market account, but it's meant to be used as a checking account. In many banks, you can only take out a certain number of money each month, usually six.
- Higher minimum balance requirements- Money market accounts may have higher minimum balance limits than regular savings accounts.
- Variable interest rate - Your money market account income will change based on the current interest rate. This means that it could go down (or up) if interest rates change overall. Choose the best CDs if you want to lock in a rate.
- Interest-earning investment- There may be a reasonable interest rate on money market funds, but each fund is different, so you should do some study before buying. The rate will also change based on the interest rate that is in effect at the time.
- Limited risk - There is some danger with these funds, but not too much because they only invest in short-term assets. Some buyers may lose money if the debt markets get shaky, but this has happened infrequently.
- Highly liquid- You can buy or sell these funds' liquid assets whenever the market is open. This means they can give you cash quickly.
- Suitable for short-term cash- If you need short-term money, like for an emergency fund, money market funds can be an excellent place to put it.
- It may not out-earn inflation - You can get cash back from money market funds, but they don't promise to beat inflation. Depending on the state of interest rates, now could be a good or bad time to buy money market funds. Rates on these funds will also change over time.
- Not appropriate for long-term investments- In the past, money market funds haven't given as good of results as stocks that did well. Also, money market funds might not grow faster than inflation, so your money may lose value over time.
- Not FDIC-protected - These funds are not insured like money market accounts are so you could lose the capital. However, this only happens sometimes.
- Fees - Given that it's a mutual fund, you will have to pay a fee to own the stock. Different funds have different fees, so you should look for a fund with a low price and a high rate of return.
If you're interested in higher interest rates than a regular savings account, a money market account might be a good choice for you. If you want to know if a money market account is correct for you, here are some things to think about:
- Interest rates - For when you want more interest than a savings account but want to avoid tying up your money for a long time, like with a CD.
- Timing- You can use your savings account when you need to, but only when you have a big buy coming up.
- Access - If you'd instead use a bank card or check to get to your savings, you can.
- Risk- If you don't like taking risks, a money market account may be better for you because the funds are FDIC or NCUA-protected.
- Minimums- If you have enough cash on hand to meet the minimum balance requirements of the banks that offer the best interest rates, you should do so.
Because they let you use debit cards and write checks, money market accounts can also be good places to keep your emergency savings.
A money market fund is a good choice if you want to earn more interest than with a money market account. To help you decide if a money market mutual fund fits your needs, here are some things to think about:
- Rates of interest- There is a better way to get money back than a money market account if you want to avoid putting your money in the stock market.
- How long - If you want to save for something long-term, like a house down payment or an emergency fund, you don't need to access your savings every day.
- Get in - If you don't need your savings right away, you'll need to move money from your money market fund to your bank account.
- Risk - If you're willing to take on some risk in exchange for a higher possible rate of return, money market funds could lose money because the FDIC or NCUA doesn't guarantee them.
As a rule, if you need more cash to open a money market account and need a low-risk investment with little to no minimum amount, this is the way to go.
MMDAs are bank accounts with limited check-writing abilities that offer FDIC insurance. MMFs are investment funds with higher yields but no FDIC insurance.
No, a money market fund is an investment vehicle managed by financial institutions, while a bank account refers to a deposit account held at a bank.
A prime money market fund typically invests in a broader range of securities, including riskier assets, compared to a regular money market fund that focuses on safer, short-term instruments.
In navigating the landscape of personal finance, the decision between a Money market account vs. money market fund hinges on individual preferences and financial objectives.
Whether prioritizing immediate access, FDIC protection, and simplicity through a money market account or seeking potentially higher returns with a money market fund, understanding the distinctions is paramount.
Each option carries its pros and cons, emphasizing the need for a careful evaluation based on factors such as risk appetite, investment horizon, and liquidity preferences. Ultimately, the choice between a money market account and a money market fund becomes a personalized strategy for achieving financial stability and growth.