Money Market Funds versus Money Market Accounts

Posted by MoneySavvy on May 31st, 2010 | no comments home title

If you’re looking for a low-risk option to invest your money – one that perhaps offers quick access to your cash with little or no penalty, then you might be investigating money market options. If this is the case, you’ll come across two basic choices: a money market account and a money market fund. What’s the difference? We’re about to show you.

A money market account is essentially a money market fund that’s offered through your local bank or credit union. A money market account, an account offered by your bank, is a savings account. The interest it pays fluctuates with the prime rate and is typically much higher than a standard savings account.

A money market account works because the bank requires account holders to meet several specific criteria including a minimum balance, fewer transactions and a large initial deposit. These criteria mean that the bank has large sums of money that they can hold on to and invest to make more money. You earn money in the form of interest which is compounded daily and paid monthly into your account.

Now a money market fund is essentially the same thing only rather than it being through your bank, which is FDIC insured, it’s through a broker or investment firm.

So besides the institution, what’s the difference?

A money market fund typically offers higher interest rates.

A money market fund typically has more risk – they’re not FDIC insured.

There are more options on how you can invest your money with a money market fund. For example, you can choose one that invests only in socially responsible companies. You can choose a money market fund that invests only in healthcare or technology. You can choose funds backed by the US Treasury or municipal funds. With a money market account, your bank chooses where they invest the money.

So what should you choose?

The answer lies with you. How much risk do you want to take on? Money market accounts are backed by the FDIC, assuming you’re banking with a protected institution. Money market funds are not. However, you can choose to purchase only funds backed by the US Treasury for more security.

Money market accounts make less in returns than money market funds. So if you’re looking to make a high rate of return on your investment, you may want to take the risk and go with a money market fund.

It may pay to think about why you’re investing and what your financial goals are. In fact, this should be decided before you start looking at money market funds or money market accounts to invest in. Having a goal and choosing an investment that supports that goal is the best way to plan your financial future.