A money market account can provide a safe place to set aside liquid funds that you may need to access in the event of a financial emergency. You can also use this type of account to hold funds during times of market volatility. No matter why you keep cash in a money market account or money market mutual fund, it is important to understand how the interest rate paid to the account is determined.
Interest Rates for Money Market Deposit Accounts
You can set aside funds in a money market account held with a bank or credit union, known as a money market deposit account. Although some may compare this to a conventional savings account, a money market deposit account varies in that the financial institution has fewer restrictions on how your deposited funds can be invested.
In a savings account, the bank or credit union is only able to lend those funds out to other customers and charge an interest rate on the loans. With a money market deposit account, banks can invest deposited funds in short-term securities, including certificates of deposit (CDs), municipal bonds and treasury notes (T-notes). Additionally, they may also loan out funds to other customers. This sometimes provides investors with higher interest rates than traditional savings accounts.
Interest Rates for Money Market Mutual Funds
Similar to a money market deposit account, a money market mutual fund provides a relatively low-risk setting for cash-equivalent liquid funds. Money market mutual funds invest in the same short-term securities as banks offering deposit accounts, which may include commercial paper, treasury securities, municipal bonds and other highly-rated debt securities with a maturity date of less than one year.
Although the interest rate paid to a money market account may not be high relative to other investment options, both money market deposit accounts and money market mutual funds may provide more interest than a conventional savings account due to the underlying securities managed by the bank or mutual fund company.