FDIC vs. SIPC for Money Market Funds Protection
Bank deposit accounts are covered by the Federal Deposit Insurance Corporation (FDIC). The FDIC protects principal and accrued interest on accounts, including bank money markets, but doesn't have to honor interest rate agreements established by failed banks.
Most investment brokerage firms are members of the Securities Investor Protection Corporation (SPIC). The SIPC is a nonprofit, nongovernmental organization that protects consumers from losses related to member firms failing.
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History
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In 1924 the Massachusetts Investors Trust established the first mutual fund in the U.S. Mutual funds quickly became popular, including money market mutual funds. In 1970 the SIPC began offering protection to consumers in the event of losses tied to bankruptcies of investment companies.
Congress sanctioned the establishment of the FDIC in 1933 to protect consumer deposits from bank failures. In 1983, the Garn-St. Germain Act permitted the establishment of bank money market accounts as FDIC-insured alternatives to money market mutual funds.
Time Frames for Money Markets
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Both money market mutual funds and bank money market accounts are intended to be short-term instruments. Traders process buy-and-sell orders for money market mutual funds once a day after the stock market closes. Buyers must pay for shares within three business days of placing an order.
Most deposits into bank money market accounts are available the next business day. Check deposits of $5,000 or more experience hold times of seven days on established accounts and nine days on new accounts.
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Benefits of Money Markets
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Bank money market accounts are FDIC-insured, so they provide investors with a safe place to stow money without fear of principal fluctuation. Money markets pay higher interest rates than savings accounts and aren't illiquid like certificates of deposit.
Money market mutual funds contain commercial paper, treasuries and other ultra-conservative investments. The principal shouldn't fluctuate, and investors enjoy steady, if modest returns on their investment. Shareholders can move money without charge into more aggressive funds in the same fund family.
Considerations
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If an SPIC member goes bankrupt, the SIPC covers up to $500,000 of losses per consumer but limits coverage of cash to $100,000, as of October 2010. The SIPC doesn't cover securities that aren't registered with the Securities and Exchange Commission. Not all investment firms are members of SIPC.
Money market accounts offered through credit unions aren't covered by the FDIC. Some credit unions enjoy deposit protection of up to $250,000 from the National Credit Union Administration.
Warning
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The FDIC covers bank money market accounts, but only up to a maximum of $250,000 per account owner. If a bank fails, balances above the threshold are potentially lost. To extend the coverage, account holders can add additional owners to an account or move funds to other banks, as coverage is counted separately at each bank.
SIPC doesn't cover losses due to market downturns or bankruptcies involving stocks and bonds held in brokerage accounts.
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