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Money Market Fund vs Money Market Account

A money market fund and a money market account sound similar, but there are distinct differences between the two. Understanding these differences will help you make better investment decisions.

Both money market funds and money market accounts are safe investments, but by no means are they designed to help you accumulate a great deal of wealth. Let’s unpack these investments in greater detail below and go over exactly how they are different. 

What Is The Money Market?

Money markets refer to trading and investing in short-term debt instruments. These debt instruments span across industries and investment options, including: commercial paper, time deposits, and even treasury bills

What Is a Money Market Fund?

A money market fund is a specific type of mutual fund. Instead of investing in various stocks, a money market fund invests in liquid, short term debt securities.

The primary goal behind a money market mutual fund is to not outperform the stock index or earn a great rate of return. Instead, money market funds are structured to maintain a stable asset value.

The money market fund will also pay it’s investors a dividend, although the rate of return is minimal. 

How Does a Money Market Fund Work?

A Money market fund works like a standard mutual fund. The fund issues shares to investors and follows the United States Securities and Exchange Commission guidelines. 

Money market funds will invest in incredibly safe debt instruments. These instruments include; certificates of deposits (CDs), commercial paper, repurchase agreements, United States Treasuries and Bankers Acceptance. 

Types of Money Market Funds

Various money market funds specialize in specific type of investments, including:

Prime Money Fund 

A prime money fund will invest in both commercial paper and floating-rate debt. These assets are typically useful for large corporations, various government agencies, and even government sponsored enterprises. 

Tax-Exempt Fund 

A tax-exempt fund allows the earnings one receives to be free of the United States Federal Income tax. Municipal bonds are what primarily makes up these funds. 

Government Fund 

A government fund has to invest at least 99.5% of its total assets in government securities or repurchase agreements. These investments must be fully backed by cash or government securities. 

Treasury Fund 

A treasury fund invests in Treasury Bills, Treasury notes and Treasury bonds. These funds are issued by the United States Government. 

What Is a Money Market Account?

A money market account is an account you set up at a bank or credit union. These accounts are deposit accounts that are essentially a blend between a standard checking and standard savings account. 

How Does a Money Market Account Work?

For the most part, a money market account will function very similar to a checking account. The account owner will be issued a debit card, and can even write checks against the account.

Like a standard savings account, one can withdraw their money up to 6x per month. The account owner can directly deposit money in the money market account and they can even be transfer it to another bank account.

Behind the scenes, a money market account will invest in highly liquid short term debt. As a result, the money market account will pay an interest rate, typically above and beyond what one would receive a checking or savings account. 

Money Market Accounts, Savings Accounts, And Checking Accounts 

Although a money market account is a happy medium between a typical savings and checking account, there is still a difference between these three account types. 

Savings Account

You will find online banks, brick and mortar banks, and credit unions all offer savings accounts. The primary purpose of a savings account is to help the account owner save money.

Typically, the account owner will not link the savings account to any type of auto bill payment. If the bank or credit union carries FDIC or NCUA insurance, the accounts up to $250,000 will include insurance. 

Checking Account

A checking account’s primary purpose is to give the account owner access to all their money without the account owner needing to carry around all the cash. The account owner can carry a checkbook or debit card and freely spend the money in the account.

People use a checking account to pay for everyday expenses, such as gas and groceries, and can even pay bills automatically through the account. A money market account is very similar to a checking account, but the money market account will earn a greater interest rate. 

Money Market Account & Money Market Fund: Key Differences And Similarities

Now with the typical banking accounts discussed, let’s dive into the main differences and similarities between a money market account and money market fund. 

Investment Type

You can open a money market account at a bank or credit union. However, you must open a money market fund through an investment broker or platform.

These funds are similar to investing in any regular mutual fund. The only difference is the investment vehicles these funds will invest in. 

Federally Insured

As long as the bank or credit union is FDIC or NCUA insured, the money market accounts the financial institution offers will be insured up to $250,000. The federal government does not insure money market funds.

Although its rare, it is possible to lose some of your money in a money market fund. 

Checks

A money market account allows the account owner to write checks against the account. A money market fund does not provide this luxury. 

Debit Card

Money market accounts do provide a debit card, and the account owner can withdraw their money up to 6x per month. A money market fund does not directly link to any bank account, therefore, it does not provide a debit card. 

Transaction Limit

Money market accounts limit your withdrawals to 6x per month whereas a money market fund does not have a withdrawal limit. 

Similar, But Not the Same

A money market account and money market fund are very similar. On a high level, these are both safe investments or account types that earn a greater yield when compared to a standard checking or standard savings account. 

Understanding how a money market account or money market fund fits into your investment goal or portfolio takes a lot more nuance. Working with a financial advisor is the best way to ensure you are taking advantage of the right investment options to achieve your financial goals!