Investments come in all different sizes with all sorts of risks. The kind of risk involved with investing has a lot to do with how much capital you put in, your investment horizon, and, more importantly, the kind of investment you choose.
Some investment vehicles are safer than others. Stocks are inherently volatile, hedge funds can be risky, and options contracts can come with big losses. Other assets like bonds provide a relatively lower risk versus less conservative assets such as options, stocks, or alternative assets.
Meanwhile, investment vehicles like money market accounts, which pay a higher return than a traditional savings account, also offer lower risk. Just don't confuse these accounts with money market funds, which is something different entirely. Below, we'll consider the difference between these two assets and how safe your money is if you invest in them.
- Both money market accounts and money market funds are relatively safe.
- MMAs are insured up to $250,000 per depositor by the FDIC.
- Banks use money from MMAs to invest in stable, short-term, low-risk securities that are very liquid.
- Money market funds invest in relatively safe vehicles that mature in a short period of time, usually within 13 months.
Money Market Accounts
Money market accounts (MMAs) are deposit accounts that can be open at banks or other financial institutions like credit unions. They act like a checking-savings account hybrid, offering both the flexibility of a checking account with the features of a savings account.
They come with checking account features, meaning you can write checks, make transfers between accounts, and conduct debit card transactions—up to a certain limit. Federal guidelines limit them to six per month, after which you're charged a service fee. These accounts also offer higher interest rates than standard checking or savings accounts. This makes them a great option for people who want to save for a rainy day, vacation, or other major expenses.
Most financial institutions require deposit minimums for most money market accounts. For instance, Bank A may require you to open an account with a minimum balance of $25,000. You may also be required to maintain that balance each month. If you dip below that amount, you will generally be charged a monthly fee.
Are Money Market Accounts Safe?
Money market accounts are generally a safe investment. For one thing, they are insured by the Federal Deposit Insurance Corporation (FDIC). The independent agency insures combined deposits up to $250,000 per depositor for member firms. If the bank or institution fails, your combined investments per member firm will be covered up to $250,000.
Another reason why these accounts are relatively safe is that they come with very low risk. That's because banks use the money from these accounts to invest in stable, short-term securities that come with low risk and are highly liquid including certificates of deposit (CDs), government securities, and commercial paper. Once these investments mature, the bank splits the return with you, which is why you end up getting a higher rate.
A money market account is a checking-savings account hybrid while a money market fund is a type of mutual fund.
Money Market Funds
It's easy to see why people may confuse money market funds with money market accounts. Although they sound similar, they're very different.
While a money market account is a type of deposit account, a money market fund is an investment vehicle. A money market fund is a type of mutual fund that allows an investor to earn interest on cash reserves within a portfolio—the stray money left over from transactions, or cash held until it can be invested in other instruments.
Instead of depositing money into an account, investors buy and sell fund shares or units. Consumers can buy shares through banks, mutual fund companies, or brokerage houses. Funds pay dividends to investors based on short-term interest rates.
Investors who want to cash in their money market funds don't have the same options as people who hold MMAs. This means you can't just write a check or make a withdrawal from your account. Instead, you have to put in a request to redeem your shares. Fund companies must make a payout with seven days of the redemption request.
Are Money Market Funds Safe?
The money market fund invests the capital in relatively safe vehicles that mature in a short period of time—usually within 13 months. They try to minimize the risk by investing in these low-risk assets for a short period of time, meaning you're guaranteed a return. These include Treasury bills and CDs.
Higher-risk money market funds may invest in commercial paper, which is corporate debt or foreign currency CDs. These holdings can lose value in volatile market conditions or if interest rates drop, but they can produce more income, too.
Money market funds are not insured against loss by the FDIC. They are required to comply with guidelines set by the Securities and Exchange Commission (SEC).