Money Market Account Vs Money Market Mutual Funds

A close relative of the money market mutual fund and high-yield savings account is the money market account.  In fact, it would be safe to say the money market account is a hybrid of the two.  Once quite popular, money market accounts have lots a lot of ground over the years to its two rivals.

Money Market Account Vs Money Market Mutual Funds

Like money market mutual funds, money market accounts invest in a variety of short-term debt instruments in the so-called money market:  certificates of deposit, commercial paper, short-term government bonds, etc.  For all their similarities, however, there are also some major differences.  For example…

• Money Market Accounts are bank deposit accounts, meaning they are FDIC insured.  Since they are deposit accounts, the bank promises to pay a specified rate of interest for the privilege of borrowing your money, just like a savings account.  If the bank invests the money poorly, it’s still on the hook to pay you back.  In the event the bank can’t make good on its promise, the FDIC will step in.
• Money Market Mutual Funds are not deposit accounts.  They are mutual funds, meaning they invest your money on your behalf.  Hence, they are not FDIC insured and if the fund manager makes poor investment decisions and loses your money, they are under no legal obligation to pay it back.  For the record, no money market mutual fund has ever lost money for its investors.
• Due to the presence of FDIC insurance, a money market account will generally pay less interest than a comparable money market mutual fund.  Even though no money market mutual fund has ever lost money for investors, it theoretically could.  In such a case, the money market account’s FDIC insurance coverage would make all the difference.
• Money market mutual funds are slightly riskier than money market accounts.

Why Open A Money Market Account?

So why should you open a money market account?  In my opinion, you probably shouldn’t.  Their decline in popularity is due to a very good reason:  they generally offer lower yields than online high-yield savings accounts but no less risky (online savings accounts are also FDIC insured).  Since online savings accounts are extremely quick and easy to open and manage over the internet, there’s really no advantage I can see to traveling to your local bank’s branch to open an account.  My online savings account of choice is the ING Direct Orange Savings Account and that’s where I hold the majority of my emergency fund.