What Is a Money Market Fund Account?

A money market fund account is a conservative investment that provides a modest return while maintaining investment principal. Money market fund accounts purchase short-term debt obligations from highly rated companies and reliable government agencies. They are often used as a holding place for cash not being used in other investments.

Identification

Money market fund accounts usually pay higher interest rates than ordinary savings accounts but lower returns than bonds or stocks over the long run. The advantage of money market fund accounts is that they are a very safe investment. They usually require investors to start with higher opening balances than a bank savings accounts. This ranges from $1,000 to $5,000. Penalties and fees can be charged if balances fall below the minimum. Money market fund accounts usually have a steady share price. Interest is paid periodically and reinvested in the form of additional shares.

Features

Money market fund accounts contain conservative financial investments like treasury bills, certificates of deposits and commercial paper. Short-term debt obligations like these usually provide a return between 2 and 5 percent. Money market fund accounts are considered "open ended investments." Cash enters and exits the fund without penalty. Investors can add and withdraw funds from money market fund accounts at any time.

Considerations

One of the advantages of a money market fund account is the low risk. While it is extremely unlikely that you can lose money in a money market fund account, it is not impossible. The interest rate can fall to virtually nothing in a short period if the prime rate is also falling. If this is below the rate of inflation, the investment is, in effect, losing money. Money market fund accounts are usually not insured by the Federal Deposit Insurance Corporation. If the company holding your money market fund account goes out of business, you might not get your money back.

Types

Not all money market fund accounts are the same. Different funds invest in different securities and have different rates of return. Investors should compare performance of different money market mutual fund accounts before committing money to any of them. Understand that past performance is no guarantee of future returns. Interest rates change constantly, so it is important to keep an eye on your account.

Function

Money market fund accounts function as holding places for cash not being used in other investments. Proceeds from sales of other securities are stored in them, and the money in turn is used to buy other securities. Often, interest and dividends from other investments are directed to a money market fund account. They are designed to be fluid and convenient. Most money market fund accounts even allow you to write checks.