Are Money Market Funds Federally Insured?

U.S. Treasury bills are one of the kinds of debt available on the money market

Money market funds are not federally insured because such funds are investments that risk losing money in exchange for the possibility of higher rates of return. The exception are money market accounts with commercial banks, which are technically deposits instead of investments, and thus insured. If the FDIC insured money market funds, they would be removing risk, which is a key mechanism of investing.

Money Market

The money market is part of the fixed income assets market (financial products that pay a fixed interest rate) that specializes in short-term debt of less than a year. The money market is intended to be a place where big institutions manage their short-term cash needs, but there are other players as well.

Money Market Funds

Many individual investors put their money into the money market because it is very safe compared to the stock market but still offers higher returns than a traditional savings account. However, because the money market is intended for big institutions, individual investors usually must put money into money market mutual funds in order to access the market.

Exception

There is one kind of money market channel that is FDIC insured: a money market bank account. Money market bank accounts are accounts through commercial banks where the bank offers a fixed interest rate and the customer is allowed to access their money a limited number of times. The FDIC insures this type of account because it is much more of a deposit than an investment.

FDIC

The Federal Deposit Insurance Corporation insures deposits made by citizens into commercial banks, and also participates in some banking regulation. The FDIC was created during the Great Depression, after a series of banks collapsed and millions lost their savings, further exacerbating the depression. FDIC insurance guarantees that if a bank collapses, all deposits will be returned to customers, up to $250,000.

Risk

Traditional bank accounts make minimal interest largely because there is no risk associated with depositing money in said accounts. Money market funds, bond market funds and other mutual funds have returns slightly higher than inflation because there is risk associated with such an account, but it is still minimal. Stocks and other financial products have the potential to make much higher returns because there is a serious risk that investors will lose all of the money they invest. If the FDIC insured any of these investments, they would be moving the mechanism of risk from private investors to the government, which would lead to a huge upswing in investments, especially unsound investments, and could leave taxpayers with investors' bills in the event of a downturn.

References

• CNN: Money 101
• FDIC: Insured or Not Insured?
• New York Times: The Money Market, Its Intricacies Explained