Types of Money Market Accounts
Money market accounts are a kind of savings account. The interest is variable and usually higher than on standard savings accounts. In addition you can write checks on a money market account. Many investors find that a money market account is a safe and profitable addition to their investment strategies. To choose the right one for your needs, you should understand the various types of money market accounts and how they work.
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Identification
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Money market funds are portfolios of short-term corporate and government bonds, usually with maturities of 90 days or less. When you invest In a money market account, you are loaning money to the fund, which in turn uses it d to purchase the securities. In return you get a share of the interest earned. Since the holdings in a portfolio change frequently as bonds mature and new ones are added, the interest rate fluctuates and is updated often (usually on a weekly schedule).
Types
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Money market accounts can be classified based on what type of institution markets the fund. Bank and credit union accounts offer money market accounts. A large number of the best-paying funds are provided by financial investment companies. The three largest are Fidelity Investments, Vantage Funds, and Charles Schwab Funds. Another way to categorize money market accounts is by the types of bonds the fund holds. Some funds specialize in corporate bonds while others hold only municipal bonds. Still others emphasize US Treasury T-Bills or have a mixture of bond types.
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Function
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Bank and credit union funds have relatively low minimum balances (typically $1000 to $2500) and allow you to write up to a half-dozen checks a month without charge as long as you keep the minimum balance in the account. These money market accounts are also insured by the FDIC (for credit unions the National Credit Union Authority). Non-bank money market accounts are not insured, but are extremely safe investments. They usually pay higher interest, but have higher minimums (up to $25,000) and may allow fewer withdrawals each month.
Features
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Money market funds that buy corporate short-term bonds normally pay the highest interest rates. However, funds that hold municipal bonds are popular with investors in high tax brackets because these bonds are tax exempt and so it's the interest on the money market account. T-Bills and other government securities offer some tax advantages so funds that hold these can also be good investments.
Considerations
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There is no one best money market account. Which one is best for you depends on how much access you need to your money, how much you want too keep as a minimum balance, and how important the interest rate is to you. Finding money market accounts of all types is easy, however. You can ask your bank or credit union what money market accounts they offer. Obtain lists of both bank and non-bank funds from websites like bankrate.com, fifinancialweek.com, and money-rates.com. Complete information on top funds is also available online. Check the websites for Fidelity (fidelity.com), Vanguard (vanguard.com) and Charles Schwab (schwab.com).
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