What’s the difference between a money market account and a money market fund, you ask. Aren’t they the same? The answer is “no” and, depending on your situation, you may want to use one, the other, or both. Let’s take a deeper look.
A money market account, sometimes called a money market deposit account, is a type of bank or credit union savings account that may add the ability to write a limited number of checks or use a debit card. Money market accounts may pay a higher interest rate than a regular savings account but may also require a higher minimum balance.
The interest rate paid on money market deposits is variable. Although check-writing may be limited, ATM withdrawals often are not. Money market accounts are grouped with other like-registration deposits under either FDIC (banks) or NCUA (credit union) insurance.
Money market accounts are good homes for emergency funds because they are liquid – you can access your funds almost immediately without downside risk. In other words, if the financial institution is sound, your principle is safe plus you will earn interest. You might want to use a money market account to save for a vacation, a car, or other short-term goal.
Income from money market accounts is taxable.
Banks and credit unions generally require customers to deposit a certain amount of money to open an account and to keep their account balance above a certain level. Many impose monthly fees if the balance falls below the minimum.
Other options for short-term saving that may pay even higher rates of interest but may have even more restrictions are high yield checking accounts and certificates of deposit. (See also Saving for Short-Term Goals.)
A money market mutual fund is a type of fixed income mutual fund that invests in cash, cash equivalents, and short-term debt securities such as US Treasury bills, commercial paper, and certificates of deposit. Some money market mutual funds invest in short-term securities that are tax-exempt.
You can purchase a money market mutual fund directly from the company that manages the fund or through a discount or full-service broker. Trades are placed for either a purchase or a sale in increments of either shares or dollars – $5,000 or 5,000 shares. Sale proceeds are usually available for withdrawal from the account the day following the trade date.
As presented by the Blackrock website:
“Some money market funds seek to offer a constant net asset value (NAV) of $1.00 (constant $1.00 per share) while other types of money market funds float their NAV to the fourth decimal place. While yield is not a primary objective, funds seek to offer investors the potential for income that approximates the rate on other overnight or short-term investments.”
Money market funds are governed by Rule 2a-7, a provision of the Investment Company Act of 1940, which sets money market fund investment guidelines for credit quality, liquidity, and duration. This type of mutual fund blends highly rated, short-term securities with longer-dated securities (up to 397 days for some funds).
To maintain sufficient liquidity to meet reasonably foreseeable redemptions, money market mutual funds must invest at least 10% of their portfolios in assets that can provide daily liquidity, and at least 30% of their portfolios in assets that can provide weekly liquidity.
Money market mutual funds offer portfolio diversification and liquidity, however they are not insured or guaranteed. They are intended to help achieve goals of principal preservation and daily access for investors. Income from a money market fund is either taxable or tax-exempt, depending on the type of securities in which the fund invests.
If you are interested in long-term investments, read HAVE YOU WONDERED WHERE YOU CAN INVEST? LET’S LOOK AT THE OPTIONS.
How do you use your money market fund – emergency fund, short-term goals, etc.? Did this article help you understand the difference between money market accounts and money market mutual funds? Do you still have questions?