A money market account can provide investors a safe haven from market volatility, but there are risks that exist with setting money aside in this type of account.

Inflation Risk

Although a money market account generally pays a higher interest rate than a conventional savings account, the interest rate paid on funds is still relatively low. Therefore, the greatest risk of keeping funds in a money market account or money market mutual fund for the long term is the loss of purchasing power due to inflation. For example, if a money market account is paying 0.5% and the inflation rate is 2.5%, an investor's real return on the funds within the money market account is -2%.

Interest Rate Risk

A money market account is typically used in conjunction with other cash-equivalent positions within an investor’s portfolio for the purpose of stabilizing otherwise volatile equity or bond positions. However, the interest rate offered by a money market account is not guaranteed. The bank or mutual fund company offering a money market account invests deposited funds in a wide range of short-term, relatively low-risk securities and, as such, provides an interest rate to money market account holders based on those underlying investments. Investors seeking a guaranteed interest rate should diversify outside of a money market account or mutual fund for longer-term investment objectives.

Money market accounts can provide investors a way to set aside short-term funds necessary for emergency savings or as a cash equivalent within an investment portfolio. However, there are inherent risks with both a money market account held with a bank and those offered through a mutual fund company. These risks should be taken into consideration before investing.

  1. What determines the interest rate in my money market account?

    Placing funds in a money market account may provide a higher interest rate than a savings account due to the underlying securities ... Read Answer >>
  2. How safe are money market accounts?

    Learn the difference between a money market account and a money market fund. Both savings vehicles are relatively safe, but ... Read Answer >>
  3. Why would you keep funds in a money market account and not a savings account?

    Read about the differences between money market accounts and savings accounts, and see why a depositor would elect a money ... Read Answer >>
  4. How much of my total assets should I be keeping in my money market account?

    Investing a portion of total assets in a cash position such as a money market account provides investors access to funds ... Read Answer >>
  5. How liquid are money market accounts?

    Understand the characteristics that distinguish money market accounts from checking, savings account and money market funds ... Read Answer >>
Related Articles
  1. Retirement

    Introduction To Retirement Money Market Accounts

    Money market funds are used in retirement plans and accounts because they are liquid, stable and pay competitive rates of interest.
  2. Investing

    The Pros and Cons of Money Market Funds

    Find out whether socking your money away in these accounts will stand up to the test of time.
  3. Investing

    Introduction To Money Market Mutual Funds

    Learn about the easiest way to benefit from money market securities.
  4. Investing

    Get A Short-Term Advantage In The Money Market

    This investment vehicle is often the perfect stop-gap measure for growing your money.
  5. Retirement

    Money Market vs. Short-Term Bonds: A Compare and Contrast Case Study

    Discover characteristics of money market and short-term bonds, including how the investments are alike and different, and the benefits and risks each offers.
  6. Personal Finance

    Handling High-Yield Savings Accounts

    Is this the savings route for you? Read on to find out what these accounts have to offer.
  7. Investing

    Savings Accounts Not Always The Best Place For Cash Assets

    Money market funds may be all that stands between you and increasing your wealth.
  8. Investing

    Money Market Accounts with the Highest Interest Rates

    Money market savings accounts can offer higher interest rates than regular or even high-yield bank savings accounts – and perks like these.
  9. Personal Finance

    4 Savings Accounts for Investors

    Curious about the best saving accounts and which ones suit investors?
  1. Retirement Money Market Account

    A retirement money market account is a money market account that ...
  2. Money Market Account

    A money market account is an interest-bearing account that typically ...
  3. Breaking the Buck

    Breaking the buck occurs when the net asset value (NAV) of a ...
  4. Super NOW Account

    An account created in 1982 that offers a higher interest rate ...
  5. Fund

    A fund is a source of money that is allocated for a specific ...
  6. Bank Deposits

    Bank deposits are money placed into a deposit accounts at a banking ...
Hot Definitions
  1. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  4. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
Trading Center