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Do You Need a Rainy Day Fund If You Already Have an Emergency Fund?Money Market Account vs. Money Market Fund: What’s the Difference?
If you’re looking for a way to safeguard your savings and maximize your returns, you have multiple options to consider. Two that might sound similar are money market accounts and money market mutual funds — but though the names sound alike, there are some major differences between these financial products.
While both options tend to offer high yields at a relatively low risk, the right option for you will depend on your short- and long-term goals. To help you choose, let’s dive into this comparison of money market accounts vs. money market funds.
What is a money market account?
A money market account (MMA) is a type of deposit account that combines many of the features of checking and savings accounts. Many banks and credit unions offer this type of account. MMAs typically offer higher interest rates than traditional savings accounts, though high-yield savings accounts may sometimes beat money market account rates.
Unlike other high-yield account options, such as certificates of deposit (CDs), an MMA allows you to access your funds at any time. Like a checking account, money market accounts offer multiple ways to withdraw cash and make purchases, often providing both a debit card and check-writing abilities.
Money market accounts are typically regulated and insured by the Federal Deposit Insurance Corp. (FDIC). FDIC-insured accounts are covered for up to $250,000 per depositor, per ownership category at each insured bank. If you bank with a credit union, your deposits may be protected by the National Credit Union Administration (NCUA) instead.
Pros and cons of money market accounts
PROS
- Typically insured by the FDIC or the NCUA for up to $250,000 per depositor
- Offers higher returns than a traditional savings account
- Funds are easily accessible through methods such as debit cards and checks
CONS
- Some banks and credit unions may charge monthly maintenance fees, especially if you have a low account balance
- Some high-yield savings accounts may offer higher interest rates than MMAs
- Monthly transaction limits may apply
What is a money market mutual fund?
Unlike a money market account, which is a type of deposit account, money market funds are a type of mutual fund. Money market mutual funds typically invest in short-term, low-risk debt securities, such as U.S. Treasuries and corporate bonds.
Because money market funds are investments, you’ll need a brokerage account to buy and sell shares. Once your account is set up, accessing money in a money market fund is relatively easy. All you have to do is sell some of your shares and initiate a transfer from your brokerage account, though it may take a day or two to receive your funds.
Unlike money market accounts at a bank or credit union, money market funds are not federally insured. Instead, they may be eligible for coverage through the Securities Investor Protection Corp. (SIPC).
Money market funds are riskier than money market accounts, though they are generally considered less volatile than other investment options. This is because money market funds aim to hold a fixed price of $1 per share, meaning the value of your shares typically will not fluctuate with the market.
Still, it’s not impossible for a fund’s share price to fall. This is called “breaking the buck,” and although it’s rare, it’s important to understand that there is no guarantee your shares will maintain their net asset value.
Pros and cons of money market funds
PROS
- Relatively low-risk compared to stocks, bonds and other investment vehicles
- Offers higher returns than traditional deposit accounts
- More liquidity than some other investment options, allowing you to access your funds relatively easily
CONS
- Not federally insured, though they may be eligible for SIPC coverage
- Subject to some market fluctuations, which could potentially impact the value of your shares
- Fees and operational expenses may reduce your overall returns
Money market accounts vs. money market funds
Now that you understand the basics of money market accounts and money market funds, let’s take a look at the two options side by side.
| Money market account | Money market fund | |
| Type of account | Interest-bearing deposit account | Investment account |
| Where it’s offered | Banks and credit unions | Brokerage firms |
| Level of risk | Generally low due to deposit insurance provided by the FDIC or NCUA | Higher than deposit accounts, but typically lower than other investment vehicles |
| Potential return | Typically higher than traditional savings accounts, but may be lower than money market mutual funds | Typically higher than money market accounts, but may be lower than riskier investments |
| Accessibility | Often comes with check-writing and debit card access, though monthly transactions may be limited | Accessed by selling shares through a brokerage account; funds typically available within a few business days |
| Tax implications | Interest is taxed as regular income | Some funds may be tax-exempt, though taxable funds usually offer higher returns |
When to open a money market account
As noted earlier, the battle of money market mutual funds vs. money market accounts has no clear winner. The right choice for you will depend on your goals and tolerance for risk.
A money market account might be your best option if:
- You have low risk tolerance: Though money market funds are considered a relatively safe investment, there is still a small chance that your shares could decline in value. If you would rather avoid this risk, you might be more comfortable with a money market account, which is insured to protect your deposits.
- You need easy access to your funds: Money market accounts typically come with a debit card and a checkbook, so you’ll be able to access your funds as needed. This might be particularly important if you’re using the account to build an emergency fund.
- You want to earn a high yield without the complexities of investing: To invest in a money market mutual fund, you’ll need to open a brokerage account. You’ll also need to sell some of your shares to make a withdrawal. If you would prefer to avoid these complexities, a money market account functions much like a traditional savings account, making it a more straightforward option.
When to choose a money market mutual fund
On the other hand, a money market fund might be a better choice if:
- You’re a new investor: If you’re looking to start investing, it’s important to start small. A money market mutual fund is a good starter investment because it offers relatively low risk, and the brokerage firm is responsible for choosing which securities to invest in.
- You’re comfortable with a slightly higher risk: Although money market funds are lower risk than other investment vehicles, there is a small chance that your shares could decline in value. But if you’re comfortable with the risks involved in investing, money market funds tend to offer higher returns than money market accounts.
- You don’t need immediate access to your funds: Although money market funds are relatively liquid investments, it will still take a few business days to sell your shares and initiate a transfer. This means money market mutual funds may be best suited for those who don’t anticipate making frequent withdrawals.
Frequently asked questions
What’s the difference between a money market account and a money market fund?
While a money market account is a type of deposit account offered by many banks and credit unions, a money market fund is a type of mutual fund opened at a brokerage. Money market funds tend to offer higher returns than money market accounts, but because your funds could be impacted by market fluctuations, there is a slightly higher risk.
How are money market funds taxed?
The earnings from money market funds are typically taxed the same as any other income. However, some types of money market funds may be exempt from federal income tax. For example, money market funds that invest in municipal securities issued by state and local governments are typically exempt from federal taxes, though these funds tend to offer lower returns than taxable ones.
Are money market funds safe?
Money market funds are generally considered a safe and liquid investment, though like any investment vehicle, there is some risk involved.