What Is the Difference Between a Money Market Account and a Money Market Fund?

Money market funds were originally introduced as higher yielding alternatives to bank products.

Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) and are financial vehicles offered by banks. Money market funds are mutual funds offered by mutual fund companies, originally as higher yielding, safe alternatives to lower yielding bank products.

Safety

Money market accounts are FDIC-insured, whereas money market funds are not. Money market funds are considered safe because they invest in short-term, high quality instruments with maturities of 200 days or less, which allow them to keep the share price constant at $1. However, their yields fluctuate daily. Historically, retail investors have never lost money in money market funds, but there is no guarantee.

Yields

Money market funds were originally introduced as higher yielding, safe alternatives to bank products; but as interest rates reached record lows in 2008 and 2009, some money market accounts began to offer higher yields than money market funds.

Liquidity

Both money market accounts and money market funds are considered equally liquid. Most money market funds offer unlimited withdrawals by check or debit card while money market accounts, by law, are limited to six monthly withdrawals.

Return

Money market funds collect interest from the underlying securities in their portfolios, deduct management fees and pay out the rest to investors in monthly dividends, so the dividend yield is, in effect, determined by the market. Money market account interest is set by the bank and can be changed at any time for any reason.

Investment Options and Taxes

Money market accounts pay interest that is taxable. Money market funds can invest in different types of securities, including U.S. Treasuries, municipals and corporates. Money market funds that invest in municipals provide income that is free from federal and state income tax. Money market funds that invest in U.S. government securities can provide income that is free from state and local taxes.

References

• Financial Industry Regulatory Authority: Bank Products