Investments come in all different sizes with all sorts of risks. So you want to make sure you put your money in a safe place. After all, you do work hard for it. 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 can be very volatile, hedge funds can be risky, and options contracts can come with big losses. Other assets like bonds provide a relative degree of safety. So do investment vehicles like money market accounts, which pay a higher return than a traditional savings account. Just don't confuse these accounts with money market funds, which is a whole other kettle of fish. Here, we outline what these two assets are and how safe your money is if you invest in them.
- Money market accounts are generally a safe investment.
- They are insured up to $250,000 per depositor by the FDIC.
- Banks use money from MMAs to invest in stable, short-term securities that come with very low risk and are very liquid, making them a safe option.
- The money market fund invests the capital in relatively safe vehicles that mature in a short period of time, usually within 13 months.
- Higher-risk money market funds may invest in commercial paper or foreign currency CDs, which can lose value in volatile market conditions or if interest rates drop.
Money Market Accounts
Money market accounts are deposit accounts that can be open at banks or other financial institutions. They may come with checking account features, meaning you may be able to write checks or do debit card transactions. They also resemble savings accounts. As an account holder, you are limited to the number of debit transactions you can do. Federal guidelines limit them to six per month, after which you're charged a service fee. These accounts offer higher interest rates than standard checking or savings accounts. Deposit minimums for money market accounts tend to be higher, and if you dip below them, you may be charged a monthly fee.
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 deposits up to $250,000 per depositor for member firms. If the bank or institution fails, your investment will be covered.
Another reason why these accounts are safe is because 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 very low risk and are very 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.
Money Market Funds
Consumers can buy into money market funds at participating banks, mutual fund companies, or brokerage houses. Instead of depositing money into an account, investors buy and sell fund shares or units. A money market fund allows the 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.
The money market fund invests the capital in relatively safe vehicles that mature in a short period of time—usually within 13 months. Overall, 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 certificates of deposit (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.
High-risk money market fund holdings can lose value in volatile market conditions or if interest rates drop, but they can produce more income.
Because they are considered investments and not deposits, 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), and are covered by the U.S. Treasury if the participating brokerage firm fails.