Money Market Fund Vs. Money Market Account

Money market funds and money market accounts are two separate entities that often are mistaken for one another. One is a type of investment with specific characteristics, and one is a type of account that uses the investment.

Comparison

A money market fund is a mutual fund that invests in short-term instruments, such as commercial paper, banker's acceptances, treasuries and repurchase agreements. A money market account is typically offered by a bank or within an IRA and is simply an account that uses a money market fund as the investment vehicle.

Money Market Mutual Funds

There are five types of money market funds to consider:

- Prime: Investments in corporate commercial paper, repurchase agreements, treasuries or any other short-term, fixed-income type of investment.
- Government: Investments solely in treasuries or government agency securities (the Government National Mortgage Association, for example) and repurchase agreements.
- Treasury: Treasury funds come in two types, those that invest 100 percent in U.S. Treasuries, and those that invest in U.S. Treasuries and repurchase agreements.
- Tax-Free: Invests in municipal securities or other instruments not subject to taxation. Be aware that some of these funds avoid securities subject to the Alternative Minimum Tax (AMT), and some do not.
- Off-Shore: These funds are typically U.S. dollar-denominated, but invest in short-term fixed income investments overseas.

Money Market Accounts

Any of the types of money market funds could be offered within a money market account. It's important to look closely at the investments within a money market account because often, it's costly ones from which the account provider makes a hefty revenue share. These accounts often offer the same features as a normal checking account, including check writing and an ATM card. For that reason, a bank may limit access to this type of account to those with a minimum balance or charge a fee. Be sure to study this closely because often the fee is greater than the additional yield the money market account generates. This is especially true in 2009 when yields are very low.

Significance

Money market funds and money market accounts play an important role in managing finances and providing liquidity to investment markets. Money market funds are an ultra-safe, highly liquid vehicle for cash to move around the economy, and money market accounts are an important vehicle for funneling money into these investments.

Considerations

Look closely at the instruments in which a money market fund invests; these are typically posted on the website of the fund company. Also, examine in detail any fees charged. Paying for a better-yielding investment is only worthwhile if the yield is greater than the fee. Lastly, if you invest in a money market account, and only one money market fund is offered, ask if other options are available, especially if you have a high balance.