Money market funds vs. money market accounts: What’s the difference?

Money market funds and money market accounts are two financial products with nearly identical names, but they are in fact quite different. Both investment vehicles are means of storing cash that you want to keep safe and accessible, both earn interest and are designated to provide stability; but one is a mutual fund subject to market fluctuations and the other is a federally insured deposit account.

These distinctions matter because they affect how your money might grow in these investment vehicles and how liquid your investment is going to be. Understanding the differences between money market funds and money market accounts can help you decide if either of these options is right for your financial situation.

What is a money market fund?

A money market fund is an investment option designed to provide returns that are generally considered lower risk and offer high liquidity, though risks and liquidity may vary by fund. These funds are a specific type of mutual fund: Investors purchase shares, and the funds invest in short-term, high-quality debt instruments such as government securities and corporate paper.

Many of these funds are structured to maintain a stable net asset value (NAV) of $1 per share, meaning each share is intended to retain a consistent price regardless of market fluctuations. This fixed NAV helps preserve principal and reduce volatility, making money market funds an option often chosen by conservative investors or those seeking to temporarily hold cash. Income is distributed to shareholders as dividends from the fund’s underlying securities.

While the risk of investing in money market funds is generally considered lower than other types of mutual funds, returns are typically modest and can vary depending on market conditions. Yields typically move in line with changes to short-term interest rates set by the Federal Reserve. At the time of this writing, the federal funds effective interest rate is 4.33%.

Of note, money market funds may have fees, which will vary by fund. It’s also important to note that they are not insured by the Federal Deposit Insurance Corporation (FDIC) but are covered by the Securities Investor Protection Corporation (SIPC), which provides limited protection in the event of brokerage firm failure but not in the case of investment losses. Money market funds are widely available through brokerage accounts, individual retirement accounts (IRAs) or managed investment accounts.

What are the types of money market funds?

There are several types of money market funds, including government, municipal and prime funds.

Institutional prime and institutional municipal funds operate under a floating NAV, which means share prices can fluctuate daily. In contrast, government, retail prime and retail municipal funds generally maintain a stable $1 NAV.

Money market funds regulatory reforms: A deep dive

Over the years, periods of market stress have exposed vulnerabilities in the structure of money market funds, prompting regulators to improve oversight and fund stability.

Money market funds underwent significant regulatory changes following the 2008 financial crisis. At that time, the failure of a major fund prompted widespread investor concern. As redemption requests surged, the fund was unable to sell assets quickly enough to meet demand without incurring substantial losses, ultimately leading to its liquidation. The event raised questions about the stability of money market funds during periods of market stress and led regulators to reevaluate the framework governing these investments.

In response, the U.S. Securities and Exchange Commission (SEC) introduced a series of reforms to strengthen the structure of money market funds. Among the reforms were higher credit quality standards, shorter maturity limits and stricter liquidity requirements, all aimed at ensuring funds held more assets that could be quickly converted to cash. More recent rule changes have provided money market funds with additional tools to manage heightened redemption activity in times of market volatility. In 2023, the SEC adopted further reforms to enhance fund resilience following elevated outflows during the COVID-19 pandemic. While money market funds are not without risk, these regulatory changes have contributed to improved stability and broader investor confidence in these funds.

Pros and cons of money market funds

Money market funds offer several advantages: They are structured to minimize default risk, provide high liquidity, and may deliver yields that are higher than those of savings accounts, depending on market conditions. Because they pool investments in short-term, high-quality debt – such as U.S. Treasuries – they’re an alternative to parking cash, especially compared to holding individual securities. They also provide built-in diversification, which may help reduce exposure to any single issuer.

These benefits come with trade-offs, however. Returns are typically modest and may not keep pace with inflation. Fees, including fund expenses, can further limit your return on investment. In addition, money market funds are not FDIC insured (though they are SIPC insured), which means investors may be exposed to losses during periods of significant market stress. Although many money market funds are structured to keep their share price steady at $1, market conditions could force the fund’s value to fall below that threshold, meaning investors might receive less than they originally invested.

What is a money market account?

A money market account is a type of interest-bearing deposit account offered by banks and credit unions. While money market accounts share some features with savings and checking accounts – such as check-writing privileges or debit card access – money market accounts are typically categorized separately and may require higher minimum balances. In exchange, they may offer higher interest rates than standard savings accounts.

Banks and credit unions may impose limits on the number of withdrawals an account holder can make. Deposits in money market accounts are insured by the FDIC or the National Credit Union Administration (NCUA), up to $250,000 per depositor, per ownership category.

While interest rates for money market accounts are influenced by the federal funds rate, they are ultimately determined by individual banks or credit unions. This means rates can vary depending on the institution and broader economic conditions. At the time of this writing, the average money market interest rate is 0.59%. Rates can vary widely, though, sometimes reaching 4% or more.

Monthly service fees, if in place, can eat into your money market earnings, particularly when balances are low. Some accounts charge a monthly fee, but some institutions allow account holders to bypass them by meeting certain requirements like maintaining a minimum balance or setting up direct deposit.

Pros and cons of money market accounts

Money market accounts offer a compelling blend of features: They often deliver more competitive interest rates than traditional savings accounts, allowing balances to grow more efficiently. At the same time, they provide convenient access to your funds – via checks, debit cards or ATM transactions – so they may offer greater liquidity than some locked-in deposit options. Money market account deposits are also federally insured (either by the FDIC or the NCUA), which adds an extra layer of protection for account holders.

These benefits may come with certain limitations, however. For example, some accounts require a higher minimum balance to earn interest or to avoid monthly maintenance fees, which can reduce overall returns. Interest rates on money market accounts are variable, too, meaning they can fluctuate with market conditions and may not be as predictable as those of fixed-rate products.

Key differences between money market funds and money market accounts

While both money market funds and money market accounts are designed for short-term cash management, their underlying structures, protections and performance characteristics are different. Understanding these differences can help you identify which option might align more closely with your financial priorities – whether that’s preserving principal at all costs, maximizing yield potential or balancing liquidity with security. The chart below highlights some of the most important distinctions between money market funds and money market accounts:

Money market funds versus money market accounts: Which is right for you?

When deciding between a money market fund and a money market account, consider how you intend to use the money, how quickly you may need access to it and the level of protection you prefer. For some, federal insurance coverage can be a primary consideration, while others may prefer the flexibility and potential for yields that may exceed those of deposit accounts, depending on market conditions, that money market funds can provide.

A money market fund can serve different purposes depending on your goals. A money market fund investor might use the fund to store cash temporarily while saving for a near-term purchase, or to park assets – such as an IRA rollover – while deciding on a longer-term investment strategy. While these funds can provide flexibility and may offer higher yields than deposit accounts, they are not federally insured and may be better suited for short-term cash management than long-term investing.

A money market account can also play an important role in personal savings. These accounts pay interest while offering limited access through check writing and debit cards, making it easier to cover unexpected expenses – such as a medical bill or car repair – without having to transfer funds from another account. They also work well as a savings vehicle for short-term goals, like a big vacation, new car or down payment on a home. Because money market accounts generally earn more interest than regular savings accounts and are federally insured, they can provide both growth and protection.

The bottom line

Money market funds and money market accounts have very similar names, but they differ in important ways. Understanding how each works can help you decide which option may be suitable for your cash management goals, both today and in the future.

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