For those who could have a lump sum of cash sitting in a checking or traditional savings account, you probably will be missing out on higher rates of interest.
Putting your money right right into a money market account or investing in a money market fund is likely to be low-risk ways to get more out of your money and hedge against inflation. Nevertheless, though they’ve very similar names, are very different from money market funds.
On this breakdown of money market accounts vs. money market funds, learn how these savings vehicles differ by the use of returns, account minimums, benefits, and risks.
What’s a money market account?
A is a sort of deposit account available from many banks and credit unions. They generally pay a greater rate of interest than typical . Here’s a have a take a look at the common rates on these common deposit accounts as of March 2024, based on the FDIC:
Unlike savings accounts, money market accounts offer you check-writing privileges, so you probably can occasionally use your account to pay bills or transfer money. They might include a debit card.
As deposit accounts, money market accounts opened with federally insured banks or credit unions are protected against bank closures. Your deposits are backed, , by either (FDIC) coverage or the (NCUSIF).
What’s a money market fund?
Though the names are similar, money market funds are quite different from money market accounts. Money market funds aren’t deposit accounts; they’re a sort of mutual fund, an investment fund that pools money from multiple investors to take a position in a basket of securities, comparable to stocks or bonds.
Money market funds put money into short-term, liquid securities, comparable to business paper (unsecured corporate debt) or (CDs). To take a position in a money market fund, you need to have an eligible investment account with an investment firm or online broker.
Money market funds are prone to be lower-risk investments than other mutual funds, and in order that they’re typically used to store money or as an alternative to traditional stocks. As an investment fund, money market funds can have higher returns than money market accounts, but moreover they
involve more risk.
As a sort of investment, money market funds are protected by Securities Investor Protection Corporation (SIPC), a government corporation that protects investors who’ve money with financially troubled brokerages. SIPC protects as much as $500,000 ($250,000 maximum for money).
Money market account vs. money market fund: Key differences
When deciding between money market funds vs. money market accounts, understanding the necessary thing features that differentiate them can assist you to pick what to do together along with your excess money:
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Availability: Money market accounts is likely to be opened through a bank or credit union, while money market funds are only available from investment firms. To take a position in a money market fund, you’ll have a brokerage or retirement account.
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Insurance: Money market accounts are backed by FDIC or NCUSIF insurance, but money market funds aren’t. Money market funds are investments, not bank accounts, so that they’re protected by SIPC.
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Returns: Normally, money market funds have higher returns than the APYs on money market accounts.
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Initial investment: Money market accounts often require larger initial deposits than money market funds. While you probably can often put money right into a money market fund with about $2,000, money market accounts often require $6,000 or more to earn the very best advertised rate and/or avoid fees.
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Risk: With a money market account, rates of interest may fluctuate, but your account won’t lose value. In contrast, money market funds have some risk; you probably can lose money if market conditions change.
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Fees: Money market accounts often include monthly fees, which is also waived for individuals who meet certain balance requirements. Money market funds involve expense ratios, which might be a percentage of the assets invested that go toward the investment firm’s administrative and management expenses.
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Taxes: Some money market funds are tax-exempt, comparable to those made up of municipal bonds. Nonetheless the interest you earn in a money market account is taxable as income.
FAQs
Is a money market fund higher than a money market account?
Whether a money market fund is healthier than a money market account is set by your goals and risk tolerance. Money market funds are relatively low-risk investments, but there’s some risk of losing money. Nevertheless, they often provide higher returns than money market accounts and regularly have lower account minimums.
Should you possibly can’t stomach taking on any risk, a money market account could possibly be a superb alternative. Chances are you’ll earn a greater APY than you’d get with a standard savings account without the danger of market changes affecting your account value.
What are the downsides of money market funds?
Money market funds typically provide higher returns than deposit accounts, but there are some downsides to recollect:
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Risk: Money market funds can lose money if the underlying securities throughout the fund drop in value.
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High investment minimums: Unlike , which can often be opened with as little as $5, money market funds have higher investment minimums. Chances are you’ll often needn’t lower than $2,000 to take a position in a money market fund.
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Fees: Money market funds involve expense ratios, which range from 0.10% to 0.76% of your invested assets. Depending in your balance, the fees could possibly be substantial.
Is it good to keep up money in a money market account?
Money market accounts is likely to be useful account options for those who could have excess money you want to for a short-term goal, comparable to an upcoming major purchase or dream vacation. Money market accounts often have higher APYs than savings accounts and can be found with check-writing capabilities and/or a debit card.