Key takeaways
- Money market accounts combine the features of checking and savings accounts and are FDIC- or NCUA-insured.
- Money market funds aren’t federally insured or regulated, but can still be a safe place to invest and grow your money.
- A money market account could be ideal if you want liquidity coupled with generous earning potential to meet your financial goals.
- If you have funds to invest at any time, a money market fund may be a better fit.
A money market account and a money market fund have similar names and serve similar purposes, but it’s important to understand that these two financial products have some important distinctions and nuances.
What is a money market account?
Money market accounts, also known as money market deposit accounts, are federally insured liquid bank accounts. They pay interest on your deposit, but your interest-earning potential varies depending on your bank. The top-yielding money market accounts currently pay APYs greater than 5 percent, while the average bank is paying just 0.61 percent on savings accounts.
How does a money market account work?
Money market accounts operate similarly to a savings account, and quite a few come with tools you would associate with a checking account, such as a debit card and check-writing abilities. You deposit money, and it’s always easily accessible.
However, there are transaction limits. You are usually restricted to six withdrawals per billing statement period. If you exceed that limit, you may pay a fee. During the pandemic, many banks suspended those fees, but since business has largely returned to normal, check for a return to those fee structures to avoid any unnecessary charges. The interest you earn on these accounts is also subject to taxation.
Are money market accounts safe?
If you’re concerned about the safety of your cash in a money market account, you can lay those concerns to rest. Provided that the bank or credit union where you deposit your money is part of the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA) network, you enjoy the assurance of insurance coverage of up to $250,000 if the financial institution fails.
What is a money market fund?
Money market funds have been around since the 1970s, but they have evolved quite a bit since their inception. Today, they vary based on the type of investment earmarked for the money in the fund. Some invest mainly in U.S. Treasury securities, and some invest primarily in corporate and bank debt securities.
How does a money market fund work?
Money market funds, also referred to as money market mutual funds, are not federally insured. However, these are still relatively safe liquid investments. Instead of paying a set interest rate, the returns are derived from the underlying investments held in the fund, minus the necessary expenses to manage it. And you won’t have access to your funds like you would with a money market account. Instead, you’ll have to initiate a transfer from your brokerage account, and it could take one or more business days for the funds to post to your account.
Because money market funds are largely fishing from the same pond of investments, there isn’t the disparity — or outliers — of returns that you see on money market deposit accounts. It’s also important to note that money market funds routinely trail what can be earned in a top-yielding money market account. And you’ll generally pay taxes on your earnings, along with maintenance fees if your account dips below a certain limit in some instances.
There are also tax-exempt money market funds, which invest at least 80 percent of their portfolios in municipal securities. In fact, in some cases, you might be able to buy shares in a money market fund that is geared to invest in securities in the state where you reside.
As of September 2024, there is about $6.30 trillion collectively invested in money market funds, according to the Investment Company Institute.
Are money market funds safe?
Money market funds are investments, and all investments carry a certain degree of risk. Money market funds aim to maintain a price of $1 per share, and even in the most tumultuous of market environments — such as the 2008 financial crisis and the 2020 pandemic-induced sell-off — nearly all of them did.
However, there is the occasional fund that “breaks the buck” and returns investors 95 cents or 99 cents for each dollar invested. Large brokerages and mutual fund companies move heaven and earth to preserve the $1 net asset value, as there is massive risk to their reputations if they don’t. Keep in mind, though: There is no guarantee of that $1 mark.
Despite the remote possibility of any loss, it is also important to note that money market funds represent some of the most conservative investments available. After the financial crisis in 2007 and 2008, the government implemented new rules to limit the risks of money market funds and make those remote risks even more remote. With a money market fund, you can feel confident you won’t deal with any sudden volatility and lose a big chunk of your money.
Differences between money market accounts and money market funds
Money market account
- Opened at a bank or credit union.
- Comes with the protection of federal deposit insurance.
- Funds earn a stated interest rate, which varies among banks and credit unions.
- Often comes with transaction limits, typically six per month.
- Best for emergency fund holdings and short-term savings goals.
Money market fund
- Opened at a brokerage.
- Safe, but not insured against loss.
- Funds are invested in a variety of low-risk, short-term securities that fluctuate in value.
- No limit on withdrawals and transfers.
- Best for a brokerage account with convenient ability to make quick investment decisions.
- You can generally earn higher rates of interest than with a money market account.
Which is better: A money market account or a money market fund?
A money market account is an especially attractive option for your emergency fund because it keeps it safe and accessible. For example, if you have an unplanned expense of $1,000 for a car repair or emergency room bill, you can pay the expense directly from the money market account or transfer the funds from your money market account into your checking account to pay the bill.
Because of its combination of liquidity with earning potential, a money market account may also be a good option for saving for short-term goals, such as a vacation, wedding or down payment.
But if you have money that can be invested at a moment’s notice, a money market fund could be a better first. Think about it as an opportunity fund: If there’s a market pullback, or you find an attractive investment option, a money market fund gives you the ability to act fast.
Bottom line
For those seeking the security of federal insurance and consistent, if varying, interest rates, a money market account may be an ideal choice, especially for emergency funds. The money market fund, with its investment orientation, is best suited for those looking to capitalize on market opportunities, albeit at somewhat higher risk.
Understanding these nuances is key to making informed choices matched to your particular financial circumstances. After you’ve compared the two types of accounts, it’s also a good idea to compare options from different banks, credit unions or brokerages, since they may offer different rates and perks.
–Freelance writer Allison Martin contributed to updating this article.
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