- Money market funds were invented in 1971, when they were offered to investors who wanted to preserve capital while earning some interest. They typically are available at mutual fund companies and, occasionally, from banks.
- Unlike savings accounts, money market funds are mutual funds. Any money you invest in a money market fund is pooled with money from other investors. This pool of money is invested in low-risk products, such as commercial paper or short-term bonds. The investment objective is to keep the share price stable at $1, while generating some dividend income for the fund. Those dividends are usually paid monthly, much like the interest on a regular savings account.
- Unlike savings accounts, money market funds pay dividends, not interest. Although money market funds are low risk, they are not insured by the FDIC. Investors can lose money if the share price drops below $1. However, that has happened only twice in the history of money market mutual funds.
- Keeping your cash in a money market deposit account at the same institution that manages your money market mutual fund allows you to execute trades at a moment's notice, rather than waiting for a transfer from an outside savings or checking account. Mutual fund companies like Vanguard, T. Rowe Price and Fidelity are great places to buy money market funds.
- Your money market deposit account is not the same thing as a money market mutual fund. Deposit accounts usually function like savings accounts, but with check writing privileges. Money market deposit accounts often offer higher interest rates than savings accounts.
