Money market accounts and money market funds are very popular with most Americans. These two financial instruments are where many Americans store their emergency savings. Despite the popularity of these two accounts, most individuals know very little about them. Today, we will take a look at the similarities and differences between both types of accounts. Although these two products sound a lot alike, there are in fact a lot of differences.
Money Market Accounts
A money market account is a deposit account that pays a high rate of interest on deposits. These accounts are FDIC insured like savings accounts but require a higher deposit amount. Money market accounts are insured up to $250,000 per account. Most money market accounts require $1,000 or more to open an account. You can get a money market account at you local bank, credit union, or brokerage firm. Money market accounts are just like savings accounts in that account holders are allowed no more than six withdrawals or transfers each month. Unlike savings accounts, most money market accounts offer account holders check writing privileges. The attraction of money market accounts is that they pay interest rates that are competitive with certificates of deposit but do not tie account holders fund up like C/D’s do.
Money Market Funds
A money market fund is a completely different type of financial product. Money market funds are mutual funds that invest in short term debt securities. These debt securities can be government securities, commercial paper, and banker’s acceptances. Most of these assets mature anywhere from two to four weeks. The average maturity of securities in a money market fund must be 60 days or less. These securities pay interest to investors. Money market funds seek to maintain a net asset value of $1. These funds are considered relatively safe investments that are highly liquid. It’s important to note that the value of these securities can fluctuate which can cause investors to lose money. Money market funds are not FDIC insured. This means that an investor can potentially lose their investment.
Differences
During the recent financial crisis, a few money market funds nearly went under. Many money market funds dropped below their $1 net asset value and lots of investors were going to lose their money. It is called breaking the buck when a money market fund drops below its one dollar net asset value. There was a major run on money market funds during the fall of 2008. The Federal government had to temporarily step in and insure money market funds.
Fortunately for investors most fund companies and brokerages covered their losses and were able to cover redemption requests. There have however been fund failures and funds that have fallen below their $1 net asset value.
Which type of account do you prefer? Do you have a money market account or a money market fund?
Photo by: JMRosenfeld
