Money Market Accounts Versus Money Market Funds: What's the Big Difference?

Barbara Marquand | guest writer for GoTalkMoney

Money market funds and money market deposit accounts are very similar, but they differ in one significant way, and it's important that you understand the difference.

Both money market funds, also called money funds, and money market deposit accounts are considered low-risk, liquid investments, and they usually offer better interest rates than traditional savings accounts. They let you write checks from the accounts and withdraw money at ATMs. And often the same bank offers both money market accounts and money market funds. Confused about the distinction? You're not alone.

Money Market Account or Fund?

Here's the key point: Money market funds are actually mutual funds that invest in short-term fixed-income investments, such as government securities and certificates of deposit. Money market deposit accounts are interest-bearing bank accounts. What impact does this have on you as an investor? Here are seven things to keep in mind.

• Because they're not bank accounts, money market funds are not insured by the Federal Deposit Insurance Corp. So if the fund goes belly up, you could lose your money. Money market funds are still considered less risky than stocks, but they are not as safe as money market accounts.

• Money market deposit accounts are insured by the FDIC. Coverage limits are $250,000 per person, per financial institution through the end of 2013. That coverage limit is permanent for some retirement accounts, but temporary for all other accounts. It will return to $100,000 in 2014 unless Congress extends the higher limit. Money market accounts through credit unions are insured by the National Credit Union Administration. NCUA insurance coverage is also limited to $250,000 per person per credit union.

Money Market Fund Risk

• Money market funds try to keep pricing at $1 a share, but values can decline, as they did last fall for the huge and well-established Reserve Primary Fund, a scenario Wall Street referred to as "broke the buck." Until then, money market funds were deemed among the safest investments. In an effort to maintain the stability of the global financial system, the U.S. Treasury put in place a temporary guarantee program starting in September 2008 to ensure that investors would not lose any of their original investments in money market funds. But that program expired in September this year, and it covered only those funds that paid a fee to participate.

• Money market funds may pay a higher yield than money market accounts, depending on the risk level of their investments. Financial experts advise that you evaluate funds carefully. Don't choose a fund just because it pays a higher yield--that higher yield may indicate riskier investments. Weigh risks when choosing funds.

• Diversify if you decide to invest in money market funds, just as you would with stocks and bonds. By investing in money market funds from different providers, you can spread out your risk.

Money Market Accounts: The Safest Choice

• Stick with money market deposit accounts if you have zero tolerance for risk. Just make sure your deposits at each of your banks are within the FDIC coverage limits. Remember, all your deposits at a particular financial institution--not just the money market account--are counted toward the insurance limit.

• Finally, shop for the best money market rates. You don't have to limit yourself to local banks in your town. Expand your search by comparing money market interest rates online



Andrew Chan • Money market funds vs. money market accounts • Jan 13, 2009 • Boston.com: http://www.boston.com/business/personalfinance/managingyourmoney/archives/2009/01/money_market_fu.html

U.S. Treasury • Treasury Announces Expiration of Guarantee Program for Money Market Funds • Sep 18, 2009 • http://www.financialstability.gov/latest/tg_09182009.html

NCUA • NCUA Share Insurance FAQ?s • http://www.ncua.gov/Resources/ShareInsurance/NCUAInsuranceFundFAQs.htm

TARA SIEGEL BERNARD • Money Market Funds Enter a World of Risk • Nov 17, 2008 • The New York Times: http://www.nytimes.com/2008/09/18/business/yourmoney/18money.html

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

Bank Name: Your E-mail: Description (Please include URL):
We HATE spam as much as you, we don't sell your e-mail address!