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Money market accounts (MMAs) and money market funds (MMFs) may sound like the same thing, but the former is actually a savings account, while the latter is a kind of investment. It’s not a matter of one being better than another; they are simply different financial products, and each can play an important role in your money management.
Read on to learn more about the uses and benefits of each.
Key Points
• Money market accounts and money market funds are two distinct ways of managing money.
• Money market accounts are bank-issued savings accounts that are typically insured by the Federal Deposit Insurance Corporation (FDIC).
• Money market funds are mutual funds offered by brokerages and usually invest in low-risk, short-term debt securities.
• Money market accounts are ideal for emergency savings or funds you need quick, reliable access to with minimal risk.
• Money market funds may suit investors looking for the potential for higher returns than traditional bank savings products.
Key Differences Between a Money Market Account and Money Market Fund
A money market account and a money market fund share the following features:
• Both options are a great place to keep cash in the short term.
• Both options are low-risk and offer yields that help boost your cash position.
• These financial vehicles offer easy access to your funds.
However, there are some important differences between them:
• A money market account is a savings account, while a money market fund is an investment vehicle.
• Money market accounts are insured by the FDIC, while money market funds are not federally protected.
• You open a money market account with a bank or credit union, but you invest in a money market fund via a brokerage firm.
• Money market accounts may or may not charge account fees; money market funds typically carry maintenance fees.
Here’s a table summarizing these differences:
| Money Market Account | Money Market Fund |
|---|---|
| A savings account | An investment vehicle |
| Insured by the FDIC | Not federally insured |
| Opened at a bank or credit union | Opened with a brokerage firm |
| May or may not have account fees | Probably has maintenance fees |
What Is a Money Market Account?
A money market account is a kind of savings account, which is one of the most common types of bank accounts. It allows account holders to earn a higher interest rate compared to a conventional savings account.
Thanks to its higher-than-standard annual percentage yield (APY), it can be a good option to earn interest. Simply put, your money can grow faster than it would in a lower APY account. (Interest earned will be taxable, as with other savings accounts.)
Another benefit is that money market accounts usually have some of the features of a checking account. These may include a debit card and check-writing abilities. It gives you easy access to spending money from your savings account.
This account type, however, typically involves a higher minimum balance compared to a traditional savings account. A money market account may also limit the number of withdrawals you can make to six per month, whether by ATM, check, debit card, or electronic transfer.
Recommended: What Is a Good Interest Rate on Savings?
Are Money Market Accounts Safe?
If you open a money market account with a bank that is insured by the FDIC, you can consider your money to be safe. FDIC-insured banks give account holders peace of mind because even in the rare event of a bank failure, your money is insured up to $250,000 per depositor, per account ownership category, per insured bank. In other words, a money market account is a very safe deposit account.
What Is a Money Market Fund?
Money market funds are a type of mutual fund and are sometimes referred to as money market mutual funds. They allow investors to purchase securities that may provide higher returns than interest-yielding bank accounts. There are various types of money market funds, but many popular ones invest in debt securities with short-term maturities. This account is typically known as a lower-risk type of investment since it invests in high-quality, short-term debt securities.
Money market mutual funds are typically offered by brokerage firms and can be used as a savings or an investing vehicle. The typical profile of a money market fund account holder is someone who wants to stow their cash away for a short period of time as an alternative to investing in the stock market. These funds tend to experience very low volatility compared to the stock market.
Depending on the specific fund, earnings may or may not be taxable.
Are Money Market Funds Safe?
Unlike a money market savings account, which is federally insured, money market mutual funds are not FDIC-insured, though they are subject to the scrutiny of the Securities and Exchange Commission. That’s because your fund could potentially lose value.
While there isn’t an FDIC safety net, money market funds likely invest in high-quality securities, so the risk of loss tends to be very low. These investments may be Treasury bills or certificates of deposit, for example. For these reasons, money market funds are considered to be relatively safe investments even though they do not protect you from losses.
Choosing Between a Money Market Account and a Money Market Fund
Here are some important factors to consider when choosing between a money market account and a money market fund. You may also decide to have both.
When to Consider a Money Market Account
Account holders may opt for a money market account if they want to get higher rates compared to traditional savings accounts. If you have an existing savings account and you want to put your extra cash to work for a higher yield, a money market account could be a suitable option. It can be appropriate for short-term savings, though it may not be the best long-term savings account option.
Keep in mind that money market accounts, unlike some other common types of savings accounts, may have minimum deposit requirements. The higher the yield you’re looking for, typically, the greater the minimum deposit may be. In addition, there may be monthly fees for these accounts.
Money market accounts are also great for account holders who want the flexibility to write checks, withdraw cash, and use a debit card for purchases. These features, which typically come with checking accounts, are some of the upsides of a money market account.
When to Consider a Money Market Fund
You may want to consider opening a money market mutual fund vs. a money market account (or any other vehicle) if you’re seeking a low-risk investment with what are probably higher yields compared with savings accounts. It may be a good option if you are, say, an investor looking to build up cash holdings through a high-quality investment vehicle that pays dividends reflecting short-term interest rates.
That said, investors must consider the fees attached to money market funds. Many investment vehicles charge a management fee or an expense ratio. This can range considerably, but the average annual rate is currently around 0.31%, so if you had $20,000 invested, you’d pay $62. This expense can eat away at your investment returns.
Recommended: APY Calculator
The Takeaway
Money market accounts and money market funds can be great tools for safely building wealth. However, they’re different kinds of products. A money market account is a savings account that earns interest while providing checking-account style access (for example, via a debit card). Money market funds are an investment vehicle that puts your money in historically low-risk debt securities. Depending on your financial goals, either or both can be a positive part of your portfolio.
If you’re looking to grow your personal finances day to day, consider what SoFi offers.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
Are money market funds safe?
While not immune to losses, money market funds are relatively safe investments since they invest in high-quality debt securities. They are subject to the scrutiny of the Securities and Exchange Commission.
Can you lose money in a money market fund?
Since money market funds are an investment, they’re not insured by the FDIC. There is a possibility of loss, but money market funds are known for investing in very low-risk debt securities.
What are money market funds?
Also known as money market mutual funds, money market funds are a low-risk investment account. They allow investors to purchase securities that typically provide higher returns than interest-yielding accounts.
Is a money market account considered cash in the bank, like a savings account?
Yes, a money market account is a savings account with some checking account features. You can withdraw money, but there may be a limit to how many transactions you can make per month. Check with your financial institution for specific account details.
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