Money market account vs. money market fund: Which is right for you?6 min read
- A money market account is an interest-bearing deposit account offered by banks and credit unions.
- A money market fund is a type of income-oriented mutual fund that invests in short-term debt securities.
- Both are low-risk and highly liquid, but money market accounts and money market funds are distinct financial vehicles that serve different needs.
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Money market accounts and money market funds may have similar names, but they have some key differences. A money market fund is a low-risk and highly liquid investment asset — specifically, a mutual fund — while a money market account is a type of deposit account offered by a bank or credit union.
That’s not to say these soundalikes don’t share some traits. Both money market accounts and money market funds are safe places to park cash, and both invest in similar things — short-term debt, maturing in one year or less. Collectively known as the “money market” (hence the vehicles’ soundalike names), these assets include:
- US Treasuries
- Bankers’ acceptances
- Repurchase agreements
- Commercial paper
- Certificates of deposit (CDs)
- Cash equivalents
Beyond that, money market funds and money market accounts are distinct financial vehicles, with different pros and cons. Let’s dive into the details.
What is a money market fund?
A money market fund is a type of mutual fund that’s typically made up of debt securities. You buy them from any of the usual fund providers — brokerages, financial services firms, and investment companies like Charles Schwab, Fidelity, or Vanguard — and hold them within your portfolio (in fact, many investment accounts automatically contain a money market fund to hold extra cash or money leftover from transactions).
You earn a variable return from the interest paid on these securities. Depending on how the money is invested, and what sort of account you hold them in, the earnings may be taxable or tax-exempt.
Within the income-investment universe, money market funds are considered pretty safe, because the entities issuing the debt tend to be sound and likely to meet their obligations. In other words: Money market funds are good credit risks.
While the low-risk aspect may be attractive, you shouldn’t expect a money market fund to make you rich — a typical annual return is between 1% and 2%. “It’s not an account established at all for gains, [it’s for when] you’re just looking for a safe place to put money,” says Ryan McPherson, CFP® and director of coaching at financial counseling platform SmartPath.
What is a money market account?
A money market account is an interest-bearing bank (or credit union) account. The money you deposit in it earns interest at a variable rate.
The annual percentage yield (APY) offered by money market accounts tends to be higher than that of a typical checking account and, usually, standard savings accounts as well. Depending on the financial institution and the size of your balance, you might earn 0.50% to 1% APY on the cash in your money market account.
The key differences between money market accounts and money market funds
1. A money market account is a bank deposit, while a money market fund is an investment product
Historically, the price of money market funds has stayed steady at one dollar per share, and that’s why investors have looked to them as a relatively safe investment vehicle — almost a cash equivalent. But while investing in a money market fund may not be as risky as buying stock, the price per share and account yields are still not guaranteed.
For example, when Lehman Brothers filed for bankruptcy in 2008, it caused the multi-billion dollar Primary Fund, which held a lot of Lehman’s (abruptly worthless) debt, to temporarily drop from $1 per share to 97 cents per share, a phenomenon called “breaking the buck.”
Breaking the buck is extremely rare. But as with any investment, some risk always remains.
This is the main differentiator between the funds and the accounts — although the value per share in a money market fund is typically one dollar, that can change. In a money market account, the value of your dollar will always be a dollar.
2. One is insured, the other is not
As with other bank accounts, money market accounts are insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). This means that the government guarantees the account funds if the financial institution fails, up to $250,000 per depositor.
In contrast, money market funds are not backed by the FDIC or NCUA — or by anybody else. The SEC regulates them, as it does most investment funds, but it certainly does not guarantee their performance or insure investors’ principal.
3. You pay to hold a money market fund
Investment companies that offer money market funds are not doing so for free — there’s usually an expense ratio built into the fund, a percentage of your net assets that goes to covering the fund’s administrative and management costs. In the case of money market funds, these expense ratios are not very high, but they do exist, and they can impact how much you actually earn from the fund.
You don’t pay to hold a money market account. However, some financial institutions do impose monthly maintenance fees if you don’t maintain a certain minimum balance in the account.
4. Money market accounts restrict withdrawals
Both money market accounts and money market funds are considered highly liquid (i.e., they let you get cash fast). But one is a little more liquid than the other.
A money market account may come with a debit card or checks that you can use to withdraw money. But, as with any savings account, you’re limited to six electronic transfers or payments per month by federal law.
As an investment account, a money market fund has no such restrictions: “You can put money in on one day and pull it out the next… and you’re not beholden to six withdrawals,” says McPherson.
Under certain rare circumstances, however, it can be harder to get your cash from a money market fund. If the market takes a downturn, the fund could impose a fee to sell shares or temporarily restrict selling them at all.
5. Money market funds often have bigger minimums
The minimum investment for a money market fund varies greatly, but generally, it’s at least four figures — comparable to what the brokerage or investment company demands for others in its fund family; sometimes less if the fund’s going into an IRA.
The minimum opening deposit for a money market account is generally smaller, ranging from $5 to $5,000.
The financial takeaway
When choosing between a money market account and a money market fund, consider what you need the money for. If you want a souped-up savings account for the long term, but need regular (if limited) access to your cash, an interest-bearing money market account may be the answer, especially if it comes with a convenient debit card or checks.
If you’re looking for a low-risk investment account as a place to store a windfall or some ready money for a while or to bring some diversification to your investment portfolio, a money market fund could be a better choice.
Of course, low risk does not mean without risk, so make sure you understand exactly what a money market fund is investing in. Plus, you need to factor in the expense ratio and think about whether the potential earnings justify the cost.