If you’re looking for somewhere to park your money, bank money markets and money market mutual funds are two good options. But because the names are so similar, many people confuse the two. They may sound alike, but they are quite different. Bank money markets are simpler to understand, but you can earn a slightly better yield with a money market mutual fund.
Money Market Account
A bank money market account is a bank or credit union product that functions similarly to a regular savings account. Money market accounts usually provide a greater interest rate on your investment than a savings account does. For the additional interest, you have to abide by certain rules that don’t come with a regular savings account. You are limited to six withdrawals or transfers per month with a money market account, and you can only write three checks against the account per month. Most money market accounts have a minimum balance requirement. Banks insure money market accounts through the Federal Deposit Insurance Corp., and credit unions insure the accounts through the National Credit Union Share Insurance Fund, both up to $250,000 per account, per institution.
Money Market Mutual Funds
A money market mutual fund is not a bank account at all, but an investment vehicle. The government does not insure money market mutual funds. However, according to the U.S. Securities and Exchange Commission, by law, mutual funds must invest in low-risk securities. Money market funds usually invest in government securities, certificates of deposit or other liquid, low-risk securities. The average maturity of investments is less than 90 days. Before investing in a money market fund, read the prospectus to find out all the information you can. You can write checks and transfer money with a money market fund, but there are usually requirements, limitations and fees.
Safety of Mutual Funds
Even though your money is not insured with a money market fund, people consider these funds to be a secure parking place for cash, according to Market Watch. To reassure investors of the safety of money market funds, investment firms typically guarantee that the net value of the fund doesn’t fall below $1 a share. Financial analyst Greg McBride of Bankrate.com told Market Watch that financial institutions will “move mountains” to keep the share value at $1.
Because someone oversees money market funds, you pay a fee called the expense ratio. You have to weigh this cost against your potential earnings. Find the lowest expense ratio you can by comparing rates online and by looking over the prospectus. Money market accounts usually don’t charge fees unless your balance falls below the minimum or unless you break any rules, such as writing more than the three allowable checks per month. Money market funds traditionally pay better interest than do money market accounts.
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