A:

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.

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