Are Money Market Investments FDIC Insured?
The Federal Deposit Insurance Corp. (FDIC) provides insurance protection for qualified deposit accounts at member banks. Deposit insurance is currently provided up to $250,000 per depositor, per insured bank and is unlimited in the case of non-interest bearing deposit accounts. This deposit insurance, however, covers only a handful of the many available money market instruments.
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Stocks, Bonds or Mutual Funds
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FDIC insurance protection does not extend to many of the commonly traded exchange securities, such as stocks, bonds, mutual funds or their associated derivatives--including futures and options. This extends to U.S. Treasury securities, such as Treasury notes, Treasury bills and Treasury bonds. Although FDIC insurance is not offered for Treasury securities, the value of such instruments are, in effect, guaranteed by the full faith and credit of the U.S. government.
Money Market Funds
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Money market funds are securities that pool the assets of numerous depositors and invest the proceeds, typically in high-quality, high-liquidity short-term securities. As a result, money market funds tend to return a reliable stream of low-yield dividends, similar to savings account interest. Many investors view money market funds in the same category as bank savings accounts. They are not. Money market funds are technically mutual funds and are not eligible for FDIC insurance protection.
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Demand Deposits
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The first of two significant forms of money market instruments afforded FDIC insurance protection is demand deposits. Demand deposits are deposits where the investor may withdraw the full amount of investment, plus any accrued interest, at any time, and typically without the need for advance notice to the bank. The most common forms of demand deposits are checking and savings accounts. Also insured in this category are similar instruments known as negotiable order of withdrawal accounts and money market deposit accounts.
Time Deposits
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The second significant category of money market instruments afforded FDIC insurance protection is time deposits. Time deposits are deposits which may not be withdrawn, without substantial penalty, until a specified date in the future. In effect, these are fixed term loans to a bank. Time deposits usually pay a higher rate of interest than demand deposits. The most common form of time deposit is a certificate of deposit, or CD.
Significance
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The FDIC insures funds through the Deposit Insurance Fund, or DIF. The DIF is a reserve account the FDIC maintains to compensate insured account holders in the case of a bank failure. DIF is funded by continual assessments on member banks, which are based on the amount of insurable deposits. It is possible that, given a large number of bank failures, DIF would be depleted. If this were to occur, it is likely that before defaulting on insurance reimbursements the FDIC would either increase the assessment on member banks or borrow from the U.S. Treasury.
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