Money Market Fund vs Money Market Account

Do you know the difference between a money market fund vs money market account? While the names might lead you to believe otherwise, a money market fund and a money market account aren't directly related. The first is a type of low-risk investment, while the second is a type of savings account. 

You can use the fund or the account as a low-risk place to save cash. However, they function completely differently. Do you need a money market fund vs money market account? To dispel confusion, you'll find key differences and similarities below to help you choose between money market funds vs accounts for your financial planning. 

What Is The Money Market Fund?

Money market funds were originally developed in the 1970s for investors to pool funds in low-risk securities. A money market fund is a type of mutual fund used to invest cash short term. These managed accounts aim to maintain a highly stable asset value while paying investors dividends. 

Money market funds typically invest in government bonds, municipal bonds (munis), treasury bonds, corporate bonds, and other low-risk, dividend-paying assets. You earn money on dividends if the portfolio generates more interest on holdings. 

Money market funds aim to maintain a net asset value (NAV) of $1 per share. That means if you invest $100 in a money market fund, you should purchase 100 shares. Most investors use money market accounts when they need a highly liquid short-term investment that pays more interest than a savings account. However, in many cases, a high-yield savings account could offer comparable returns with no risk. 

How Does a Money Market Fund Work?

Money market funds are a type of mutual fund and function as such. You can purchase money market funds through a brokerage. The exact investment portfolio of each money market fund differs, but all focus on low-risk securities. 

You can invest in money market funds instead of holding cash or to balance the overall risk of your investment portfolio. With shares typically priced at $1, putting a small or large amount of cash into a money market fund is easy. 

Keep in mind that money market funds aren't insured by the FDIC. While they are low-risk, they're not risk-free. They're not as secure as keeping the money in an FDIC-insured account like a high-yield savings account, checking account, or money market account (more on that below). 

Types of Money Market Funds

While some money market funds hold diverse securities, many money market funds focus on one type of investment security, like government or municipality bonds. Common types of money market funds you can consider include: 

Prime Money Fund 

Prime money funds invest in corporate bonds. These are generally considered higher risk than government bonds but also offer modestly better returns and potential additional dividend payments. 

Tax-Exempt Fund 

A tax-exempt fund usually invests in municipal securities issued by state and local governments. As the name implies, earnings from these funds are generally tax-exempt, making them attractive to many investors. However, municipal securities carry greater risk than government bonds or treasury bonds, next on this list. 

Government Fund 

Government money market funds invest 99.5% or more of their total assets in very liquid investments like cash, government securities, or repurchase agreements fully collateralized with government securities. These are low-risk investments with modest returns. 

Treasury Fund 

Like government funds, treasury money market funds focus on investing in short-term treasury securities like T-bills. With a treasury fund, you get the security of government backing, which means low risk and moderate to low returns.  

What Is a Money Market Account?

In contrast to money market funds, a money market account is similar to a savings account but with better liquidity. You can open money market accounts with a bank or credit union. 

Why would you choose to open a money market account over a checking or savings account? In some ways, a money market account combines the best of both worlds. You get higher interest rates, comparable to a savings account, with the ease of access provided by a checking account. 

With a money market account, you can usually access funds via check, debit card purchase, or ATM withdrawal. You'll also get access to online banking or an app to track your balance, make transfers, and even plan your budget. 

If you're looking for an insured money market account, the good news is that money market accounts are FDIC or NCUA insured up to $250,000 per account holder and per institution.  

How Does a Money Market Account Work?

The funds in a money market account grow at a set interest rate (specified at account opening). Be sure to double-check long-term interest rates, as some banks offer higher promotional interest rates for the first six months to one year.

With a money market account, you can withdraw funds anytime via bank transfer, check, debit card, or ATM withdrawal. Some offer attractive bonuses like cash back on purchases, higher interest rates, automatic savings tools, or budget planning integrations. 

Compare money market account interest rates with the best available rates on high-yield savings accounts to determine which makes more sense for you. Generally, savings accounts restrict monthly withdrawals and don't offer debit cards, which is why you choose a money market account in addition to a high-yield savings account.

Money Market Fund vs Money Market Account 

Do you need a money market fund vs a money market account? As the two are similar in name only, here's a comparison to help you decide which makes more sense for your goals: 

Nature and Regulation

A money market account is a type of savings account available through banks or credit unions. It is FDIC insured for up to $250,000 per account holder per institution. That means a couple could have up to $500,000 insured. A money market account up to this amount is a zero-risk investment.

On the other hand, a money market fund is an investment product. It is not FDIC-insured, and its value can change according to market fluctuations. For the sake of comparison, money market funds are regulated by the Securities and Exchange Commission (SEC), although this isn't comparable to FDIC insurance.

Risk and Return

Money market accounts typically offer lower returns than other investment options like stocks or mutual funds. However, they come with no risk up to FDIC insurance limits, and maximum liquidity.

Money market funds aim to preserve the value of your investment and may provide a slightly higher return than traditional savings accounts or money market accounts. However, they are not risk-free, and returns may be comparable to high-yield savings accounts.

Liquidity

Money market accounts are liquid accounts, meaning you can access funds anytime via online transfer or spend your money via checks or debit cards. 

Money market funds also allow you to redeem shares anytime, converting your investment into cash. However, some funds may have restrictions or fees for early withdrawals. And, there's always a risk of loss of share value when you need to sell.

Minimum Investment

Most money market accounts have low minimum deposit requirements, making them accessible to more people. Compared to the low balances of money market accounts, money market funds usually require a higher minimum investment. Minimum investment requirements vary by the fund provider.

Provider Type

Banks and credit unions offer money market accounts. These financial institutions are regulated by banking authorities and FDIC or NCUA insured. On the other hand, mutual fund companies and brokerage firms offer money market funds regulated by the SEC.

Do You Need a Money Market Fund vs Money Market Account?

Do you need a money market account vs fund? That depends on your financial goals. A money market account offers the greatest simplicity and liquidity for basic savings goals, while a money market fund offers the potential for higher returns but comes with risk. For many investors, the answer to money market fund vs money market account is to have both!

Frequently Asked Questions