What is the difference? – Forbes Advisor

At first glance, a money market account may look like a money market mutual fund. However, these two financial tools have differences that are worth noting.

Here’s how to decide which one is best for your financial goals.

What is a money market account?

A money market account can be described as a mix between a checking account and a savings account. It shares some features of both account types, making it a bit of a hybrid.

How does a money market account work?

Available at banks and credit unions, money market accounts offer several great features for consumers:

• Interest. Money market accounts earn interest like savings accounts.
• To access. You can get debit card and check-writing privileges with a money market account, offering the features of a checking account with the interest-bearing nature of a savings account.
• Assurance. Like your checking account and savings account, a money market account is insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Association) for up to $250,000 per depositor, per ownership class.

Consumers may like money market accounts because they offer interest income and more liquidity than savings accounts.

But money market accounts have some functional drawbacks.

For example, like savings accounts, money market accounts usually come with transaction limits. For example, in the past, money market account holders were limited to six convenient withdrawals or transfers per month. This means that you can only make a total of six debits, checks or digital transfers each month (for example, transferring money to your checking account or paying a bill).

In April 2020, the Federal Reserve issued an interim rule that lifted the six-transaction limit on savings deposit withdrawals (there is no expiration date for this interim rule as of March 2022) . However, your bank or credit has the right to charge a fee if they maintain the six withdrawal limit. Speak with your financial institution before opening a money market account to confirm your financial institution’s limits and transaction fees to ensure that a money market account meets your needs for accessing funds.

Although money market accounts offer higher interest rates than checking accounts and regular savings accounts, these higher rates come with a caveat. Money market accounts tend to have higher opening balance requirements than a standard checking or savings account, with some as high as $25,000. Some consumers may find these account minimums difficult to meet.

How to open a money market account?

Opening a money market account can be done in person or online. You will need to complete an account application, provide the necessary identification, and then fund your new account with the minimum deposit required.

What is a money market mutual fund?

Money market mutual funds, also known as money market funds, are investment products that allow consumers to earn interest in a lower risk environment than the stock market. They offer similar liquidity to a money market account, but have differences that set them apart from a deposit account with your bank or credit union.

How does a money market fund work?

A money market fund is like other mutual funds: it holds a “basket” of securities that generate the gains and losses that investors experience as shareholders. Money market funds typically hold securities such as US Treasuries, corporate bonds, and other short-term, low-risk investments to achieve cautious gains instead of aggressive growth.

Here’s how money market funds compare to money market accounts:

• Interest. Money market funds generally earn slightly more interest than a money market or savings account.
• To access. Unlike a money market account, investors do not have access to funds through debit cards or check writing privileges.
• Assurance. Because money market funds are investment products, they are not insured against losses by the FDIC or NCUA. Your investment could lose money.

Money market funds are issued in stocks, and fund managers try to keep the price per share (also called net asset value or net asset value) as close to $1 as possible. While it’s rare for a money market fund to lose money to investors (often referred to as “breaking the ball”), it happened as recently as 2008 during the financial crisis. . At that time, the main fund could only pay investors 97 cents on every dollar invested.

Investors can use money market funds as an alternative to a high yield savings account. But investors should be aware of any delays between transferring money from a money market fund to their brokerage. There will usually be a transfer time between the withdrawal of the money market fund and the arrival of the funds in their bank account.

Finally, consumers should note that while a money market account may have monthly maintenance fees, money market funds have management fees, also known as expense ratios. These fees are expressed in percentages and have an impact on your overall returns since they are deducted from your income. Be sure to compare the cost of all account fees and expense ratios and consider the impact of these expenses on your income.

How to open a money market fund?

To open a money market fund, you will need to open a brokerage account. Once you complete the account application and provide the necessary credentials, you will make an opening deposit to your account.

However, unlike a money market account where the deposit is the last step between you and earning interest, you will need to take extra steps to invest in a money market fund.

First, you will need to research the money market funds available. Once you have found one that meets your needs, you will need to place an order to buy shares of the fund. Once these shares are purchased, your money will work for you.

How can you compare a money market account to a money market fund?

This chart can help you quickly compare the features of a money market account versus a money market fund:

When should I consider a money market account?

If you’re intrigued by the potential for higher interest rates than the typical savings account, choosing a money market account might be a good idea. The following considerations can help you decide if a money market account meets your savings and liquidity needs:

• Interest rate. If you want a higher interest rate than a savings account but don’t want to lock your money into a longer-term commitment like a CD.
• Hourly. If you don’t need daily access to your savings, but plan to make a major purchase in the near future.
• To access. If you prefer the ease of using a check or debit card to access your savings.
• Risk. If you are risk averse, you may prefer the low risk of a money market account since the funds are FDIC or NCUA insured.
• Minimums. If you have the money available to meet the account minimums required by the banks offering the highest interest rates.

Money market accounts can also be attractive places to keep your emergency savings, especially since they offer debit cards and check-writing privileges.

When should I consider a money market mutual fund?

If you’re interested in earning a slightly higher interest rate than a money market account, a money market fund might do the trick. Here are some considerations to help you decide if a money market mutual fund is right for you:

• Interest rate. If you want a higher rate of return than a money market account, but don’t want to invest in the stock market.
• Hourly. If you don’t need daily access to your savings and have a longer-term savings goal, such as a down payment on the house or your emergency fund.
• To access. If you don’t anticipate needing immediate access to your savings, you will likely need to transfer funds from your money market fund to your bank account.
• Risk. If you don’t mind taking on a little risk in exchange for the higher potential rate of return, money market funds are not FDIC or NCUA insured and could suffer a loss.
• Minimums. If you have less cash available than a money market account requires and need a low risk investment vehicle with a low or no minimum balance.

Conclusion

Money market accounts and money market mutual funds offer investors several advantages over a typical low-interest savings account. To find your ideal fit, be sure to consider when and how you might need to access the money and the level of risk you are willing to undertake.

Although both are low-risk vehicles, only money market accounts are insured by the FDIC or NCUA. Money market funds can lose money in extreme market conditions.

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