With federal interest rates on the rise, there are plenty of accounts that can help you take advantage of great earnings on your short-term savings.
But before you open a new account, it’s important to understand what you’re getting into — not only the annual percentage yield (APY) but also any account fees, restrictions, and how safe your money is.
Money market accounts and money market funds are two of those short-term savings vehicles that may look more appealing as rates tick higher. And though they certainly sound similar, these two financial accounts have some big differences.
A money market account is something you might consider as an alternative to a high-yield savings account, while a money market fund is an investment account that can make up part of your investment portfolio. Here’s how to decide between a money market account and money market fund, and when each one might make sense for your goals:
What Is a Money Market Account?
Money market accounts have many similarities to traditional and high yield savings accounts since they offer interest on your deposits without any risk, and allow you to access your funds at any time. Many money market accounts offer debit card access or check-writing capabilities, so you can move money in or out easily.
Like savings accounts, money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) — up to $250,000 per account holder.
One way money market accounts can differ from high yield savings accounts is the different interest rates you can earn depending on how much you deposit in the account. Typically, the highest rates are offered on the highest balances, and money market accounts are more likely to have minimum balance requirements.
Here are NextAdvisor’s picks for the top money market account rates today:
What are money market accounts best for?
Money market accounts are best for short-term savings you want to keep highly liquid. Traditionally, money market accounts were higher-interest alternatives to savings accounts. But today, they carry largely the same interest rates as high-yield online savings accounts. If you’re looking for an account with easy access via check or debit card, though, a money market account may still be best.
What Is a Money Market Mutual Fund?
Broadly, a money market fund is a type of investment that aims to offer relatively safe and stable returns when compared to other stock market investments, says financial advisor Melanie C. Simons of ReFrame Wealth.
There are different types of money market funds, which can hold different types of investments. Some primarily hold U.S. Treasury securities, while others may be made up of mostly corporate debt securities. Money market funds are good for shorter-term cash flows than other investment accounts — they aim to maintain a $1 net asset value, according to the Securities and Exchange Commission.
However, there are some added risks involved compared to deposit accounts held at a bank.
“Money market mutual funds are inexpensive compared to other investment vehicles, relatively liquid, and can be held in many different types of investment accounts,” says Simons. “However, they are not guaranteed and can technically lose value.”
Because they’re investment accounts, money market funds do not come with FDIC insurance. The money you keep in a money market fund is not protected if the financial institution defaults or files for bankruptcy.
What are money market funds best for?
Money market funds can make a worthwhile addition to a larger diversified investment portfolio. “The money market fund can be used as flexible and liquid funds to help rebalance a portfolio or pay recurring fees associated with management of your assets,” Simons says.
You might use a money market fund as a place to keep cash you intend to invest before you decide where you want to put it long-term.
However, because of the potential risk still involved with market volatility and lack of insurance, a money market fund may not the best place to keep funds you’ll need quick access to, like an emergency fund.
Money Market Account vs. Money Market Fund
|Money Market Account||Money Market Fund|
|Safety||Comes with up to $250,000 in FDIC insurance per depositor, per account||Relatively safe compared to other investments, but still subject to market volatility and not FDIC-insured|
|Where to Open||Banks, credit unions, and online financial institutions||Brokerages and investment companies|
|Accessibility||Access your funds via online transfer, an ATM, debit card, or checks||Liquid; you may be able to retrieve your money within a day from the fund|
|Interest Growth||Currently between 1% and 2% APY||Varies; investments are held in low-risk securities with modest growth|
|Fees||Often no fees; may require a minimum balance to avoid fees||Expense ratios vary|
How Do These Accounts Compare to Savings Accounts?
Money market accounts are very similar to savings accounts since both offer interest and come with FDIC insurance. They’re also both free of risk, since you cannot lose the principal you deposit (up to FDIC insurance limits). In today’s rate environment, money market accounts and high yield savings accounts offer very similar rates of return.
On the other hand, money market funds are a bit different. They do come with some added risk. Without FDIC insurance, and because the prices of the shares you hold in the fund fluctuate, you can face financial losses on your principal balance. Plus, like other investment accounts, these funds carry expense ratios.
They have a relatively low return compared to more risky investments, so many money market funds today (like Vanguard Treasury Money Market Fund (VUSXX) and Fidelity Investments Money Market Portfolio (FMPXX)) earn around the same as high yield deposit accounts.
Make sure to compare money market accounts and money market funds based on their fees. Where many money market accounts come with no hidden fees, money market funds charge expense ratios that can eat away at your returns.
How to Decide Between a Money Market Account and Money Market Fund
If you can’t decide between a money market account or a money market fund, consider what your financial goals are, and which account type can help you reach them.
That’s because these two products serve largely different purposes. In fact, both account types can fit within your overall financial plan.
Money market accounts are deposit accounts held at a bank. They make a good option for emergency funds and other short-term savings goals you may need to access on short notice. But money market funds are investment accounts that can help round out a diversified investment portfolio. They’re ideal for storing money you intend to invest in longer-term mutual funds, or for adding a more conservative investment to your overall portfolio.
At the end of the day, a money market account, a money market fund, or a regular checking or savings account can all help you reach different goals with your money. And if you’re still unsure of the best plan for your cash, consider speaking with a financial advisor who can help you determine the best plan for you.