Money Market Funds vs Accounts

Money market accounts are bank alternatives to money market mutual funds. What’s the difference? The main factors are risk and choices. Let’s do a comparison of money market funds vs. money market accounts so you can make the best choice.

Money Market Accounts

Money market accounts are your plain-vanilla option. They’re what you’ll find at a bank. Money market accounts should pay you a nice annual percentage yield (APY) while keeping your money safe.

Money Market Funds

Money market funds are more complex – you’ll find more options and you’ll likely earn a slightly higher yield than you’d get from a money market account. Some examples of money market fund options are:

• US Treasury backed money market funds
• US government and agency backed money market funds
• Municipal money market funds
• Local municipal money market funds
• Socially responsible money market funds

The options listed above allow an investor to choose the money market instruments used in the fund. Some people are only comfortable with securities backed by the US government. Likewise, some people use municipal money market funds in order to earn tax-free income.

Safety First

For some investors, safety is more important than high returns. If you agree, you should stick with money market accounts. Money market accounts offered by banks are typically FDIC insured (although you should check with your bank and the FDIC for details).

If money market accounts are FDIC insured, it’s only fair that they would offer a slightly lower rate than a money market fund.

Money Market Account or Money Market Fund?

Which should you use? It depends on what you want. Money market accounts have their place, as do funds.

The main thing is to consider your needs. If you don’t need the options available from funds, just use a money market account. You should get a competitive return from a money market account, and you can sleep at night knowing that you’re taking less risk.

In addition, you should consider how much time and energy you’re willing to invest. Money market accounts will be easier to find at standard banks. For a money market fund, you may have to open an account with a brokerage firm or mutual fund company.