Money market accounts differ greatly from money market fund accounts, regardless of their similar names. Money market accounts (MMAs) are offered by banks and credit unions as alternative, higher earning savings accounts. Money market funds (MMF) are short-term mutual fund investment accounts offered by investment firms. While one type is not "better" than the other, the differences are dramatic and important.
Federal Government Insurance
Your MMA deposits are insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000, while your MMF monies have no insurance -- all funds are at risk. Your MMA carries a stated interest rate while an MMF earnings depend on mutual fund performance. Should your bank fail, your deposits will be replaced if you have an MMA. Investment firms, regardless how large and well endowed, are ineligible for federal deposit insurance. MMAs are simply alternative bank or credit union savings accounts and come with federal insurance, either FDIC or NCUA (National Credit Union Administration) deposit insurance.
MMAs have a stated interest rate, set by your bank or credit union. MMF earnings depend on the performance of the mutual fund(s) assigned to your account. You could earn a much higher return on MMFs, but you could also lose your entire investment. You'll typically earn less on an MMA, but your return is guaranteed by the bank or credit union. Should the financial institution fail, your earnings may be limited to the interest posted prior to the bank's failure, since unposted interest is not federally insured. But, the risk of loss with an MMA is much less than with an MMF.
An MMF usually accepts account additions and reductions per your investment account agreement. Most banks restrict transactions, deposits and withdrawals, to six per month. While these restrictions are seldom problematic, you must understand and accept them. Your investment firm controls the transaction level of your MMF as well as its composition of funds. Since neither type is meant to be a transaction account, like a checking account, the allowable monthly volume of transactions should not be a serious roadblock for either option.
Both accounts may have minimum balances that must be maintained. Neither account is designed for the very small investor, although MMAs typically have more modest minimum balances, often $500 to $1,000. MMFs come in many varieties with many different minimum investment levels to accommodate all investors. Both accounts prohibit deposit/investment levels below stated minimums. Should your minimum balance in an MMA fall below the minimum, your interest rate will decrease or your account will switch to a different savings product. An MMF specifying a minimum investment will be affected by mutual fund losses. Understand your MMF agreement and your responsibilities should your balance fall below the minimum required.
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