The Definition of a Money Market Savings Account
Money market accounts combine some of the most convenient features of mutual funds, savings and checking accounts. Savers and investors with a low tolerance for risk might find these accounts useful and generally safe in comparison to riskier investments such as stocks or bonds. Although there are limitations on balance requirements and withdrawals, money market accounts store your money in an interest-bearing account that may be more beneficial than a traditional savings account.
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Definition
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A money market savings account is a type of mutual fund that invest deposits exclusively in short-term instruments. According to the U.S. Securities and Exchange Commission, money market accounts are legally bound to limit investment activity to low-risk securities. The money market is where investors trade low-risk, short-term investments such as short-term bonds issued ed by large corporations and the federal government to finance short expenses.
Advantages
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A couple of the advantages of using a money market savings account as an investment tool are liquidity and safety. Although the profits from money market investments are not enormous, they typically yield better returns than traditional savings or checking accounts. As a result, a money market account can help you increase your savings while keeping your money sheltered. In addition, money market accounts are highly liquid, meaning that you can withdraw and add money to the account easily. Money market savings accounts are insured against loss by the federal government. According to the Federal Deposit Insurance Corp., only money market deposit accounts are eligible for government insurance. Currently, deposits up to $250,000 are insured until the end of 2013. However, similar money market accounts like money market mutual funds are not insured.
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Risk
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Although money market savings accounts are among the safest financial instruments, there can be risks. For instance, if inflation grows faster than the interest rate the account earns, the purchasing power of your money diminishes over time. In addition, short-term investments may lose money, although this is generally rare. Since the money market deals in short term bonds, the company that borrowed money from short term bonds may end up bankrupt, resulting in losses for your account.
Purpose
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The purpose of the money market is to provide corporations and the government with short-term cash. As a result of these short-term transactions, the risk to money market savings accounts is relatively minimal. This is largely due to the low volatility that occurs in the financial markets in the short term. In contrast, financial markets experience a high degree of volatility over the long term.
Features
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The features of money market savings accounts differ among the banks that offer them. Generally, the banks that offer money market accounts may require a minimum opening balance. In addition, some banks may also impose a minimum balance while you have the account open. Withdrawals may also be limited to a few every month. Any withdrawals beyond the limit may result in fees.
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