Saving and investing are two useful personal finance tools if you’re looking to increase your assets. Whether you’re saving for a wedding or need to build up an emergency fund, money market accounts and money market funds can help you grow your short-term savings.
Their names may be similar, but their structures — and functions — are different. Money market accounts are bank accounts that tend to pay high interest rates, while money market funds can be a way to begin investing. Read on to learn more about the distinctions between money market funds and money market accounts.
Table of Contents
- What is a money market fund?
- What is a money market account?
- Key differences between money market accounts and money market funds
- What to consider before investing in money market accounts and money market funds
- When to use money market accounts versus money market funds
- Who has the best money market accounts and money market funds?
- Money market account versus money market fund FAQs
What is a money market fund?
Money market funds, or money market mutual funds, are a type of mutual fund regulated by the U.S. Securities and Exchange Commission (SEC) that invests in low-risk, short-term debt securities.
A mutual fund combines money from multiple parties to invest in a variety of securities. You can purchase shares of a mutual fund similarly to stocks, but a fund manager will choose the securities that you'll invest in.
Because money market funds generally choose low-risk investments, they often have lower returns than other types of mutual funds. Rather, the returns are typically on par with the interest you’d earn from high-yield savings accounts.
Pros and cons of money market funds
- Ability to invest in low-risk securities, such as certificates of deposit (CDs) or U.S. Treasury bills
- Easy diversification, as money market funds can invest in many different securities
- Low volatility
- Easy to sell or redeem your shares to get funds out quickly
- Low returns compared to other investment opportunities, like traditional stocks
- Fees and expenses may be high in relation to returns
- Not protected by the Federal Deposit Insurance Corporation (FDIC)
What is a money market account?
A money market account, or money market deposit account, is a type of bank account that may require a minimum deposit or have restrictions on how and how often you can make withdrawals. Typically, you can make unlimited withdrawals from your money market account in person, by phone, at an ATM or by mail. However, withdrawals might be limited for checks, debit cards and transfers.
Money market accounts typically have higher interest rates than other types of savings or checking accounts, especially during periods of high inflation. They are either insured by the FDIC or protected by the National Credit Union Administration (NCUA), which insures deposits in case your bank or credit union fails.
Pros and cons of money market accounts
- Higher interest rates than traditional savings accounts
- Easy access to your money even with withdrawal limitations
- Low risk with interest rates that are linked to the Federal Reserve
- Lower returns than if you invested in higher-risk options
- Limited withdrawals with debit cards, checks and electronic transfers
- Many have minimum deposit and balance requirements to open an account and avoid paying fees
Key differences between money market accounts and money market funds
|Money Market Accounts||Money Market Funds|
|Type of Instrument||Interest-bearing account||Mutual fund|
|Returns||Influenced by the federal funds rate||Based on the performance of investments included in the fund, generally comparable to short-term interest rates|
|FDIC Insurance||Covered by the FDIC or NCUA up to $250,000||Not covered by the FDIC or NCUA|
|Check-Writing||Available with most accounts but may be limited||Not available|
|Minimum Investment||Typically between $100 and $3,000 but can go up to $50,000 to unlock certain benefits||Typically between $500 and $5,000 but can go up to $100,000|
|Liquidity||Withdrawal restrictions depending on method||Easy to sell or redeem shares|
|Fees||May have monthly fees, excessive use fees and check-writing fees||Service fees and management fees|
What to consider before putting your money into money market accounts and money market funds
Consider the following factors before deciding whether to invest in a money market fund or open a money market account.
1. Interest rates
Money market accounts and money market funds both offer relatively low interest rates and returns. The interest rate you'll earn on a money market account is influenced by the federal funds rate set by the Federal Reserve. While this is usually higher than rates for many other types of accounts, such as checking or traditional savings accounts, it’s generally still lower than if you took that money and put it into certain investments (like the stock market).
Similarly, money market funds invest in securities with lower returns, which means you may see gains that are similar to the interest rates found with money market accounts and high-yield savings accounts.
2. Fees and expenses
There typically aren’t a lot of fees and expenses that come along with money market accounts and money market funds. However, because they tend to have lower returns, even minimal fees can have an impact on what you’re actually earning. Money market funds often don’t have entry or exit charges. However, there is sometimes a management fee that might eat into your returns.
Money market accounts may have monthly fees, but you can generally avoid paying them by meeting the minimum balance requirements set by your financial institution. Some banks may also charge check-writing fees or excessive use fees if you make too many withdrawals in a set period of time.
3. Risk level
Both money market accounts and money market funds are considered relatively safe. With money market accounts, it's unlikely that you would lose money by using them — unless your fees exceed your returns.
Because they are investment-based, money market funds are slightly more risky, but they are still focused on low-risk securities. As long as you check the history of the fund and read through its prospectus, you should be able to trust in small returns.
Money market accounts tend to be more liquid than money market funds. There are many ways to withdraw your funds from a money market account, including via ATMs and in person. You may also be able to access cash with debit cards or checks, although you may be limited to a certain number of these transactions each month.
If you want to pull funds out of a money market fund, you’ll need to sell or redeem your shares. While this is more complicated than using a deposit account, most money market fund managers will purchase shares back easily since they tend to be in high demand. Therefore, money market funds still have high liquidity compared to some other types of investments on the stock market.
5. Minimum investment requirements
Financial institutions and fund managers will set their own minimum requirements for money market accounts and money market funds, respectively.
Money market accounts may have higher minimum deposits than other types of bank accounts, but more options have become available in recent years with no minimum deposits. While these accounts are accessible, you may still need to meet minimum deposit requirements if you want to unlock higher interest rates or avoid certain monthly fees.
Money market funds tend to have low minimum investment requirements compared to other types of investments. The minimum investment may range between zero and a few thousand dollars, depending on which fund you choose. However, there are usually no entry or exit charges, which can greatly reduce the barrier to investing.
6. FDIC insurance
Money market accounts are typically protected by the FDIC or NCUA up to $250,000 per person, per institution and per account type in case of bank failure.
However, money market funds are not deposit accounts, which means they are not protected by this insurance. While money market funds are relatively low risk, there is still a chance that you could experience losses that are not covered by the FDIC or NCUA.
When to use money market accounts versus money market funds
While money market accounts and money market funds may sound similar, they actually have drastic differences.
When to use a money market account
Money market accounts are best used to achieve short-term savings goals, such as building an emergency fund or saving for a down payment on a house. Their higher-than-average interest rates and liquidity make it easy to build funds that you can withdraw as needed.
When to use a money market fund
Money market funds are also good for short-term savings goals. While they are considered investment vehicles rather than savings accounts, they still offer low-risk growth opportunities and relatively high liquidity compared to other investments. Money market funds can also be a good option for beginner investors who want to learn more about how mutual funds and the stock market work.
Who has the best money market accounts and money market funds?
Take a look at some of the best money market accounts and best money market funds below. These rates are current as of July 26, 2023.
Best money market accounts
|Ally Bank||Sallie Mae||Discover|
|APY||4.30%||NATP, NAEA, California Tax Education Council (CTEC)||None|
|Minimum Deposit to Open||$0||$0||$2,500|
|Minimum Deposit for Highest Interest Rate||$0||$0||$100,000|
Best money market funds
|Fidelity||Vanguard Federal||Invesco Government|
|Expense Ratio||0.42%||0.11%||0.27% to 0.76%|
Money market account versus money market fund FAQs
How is a money market account different than a money market fund?
Is a money market account better than a money market fund?
When is the best time to invest in money market accounts and funds?
What are the best money market accounts?