What Is the Difference Between a Money Market & Cash?
A money market fund is designed to work very similarly to cash in a bank account, but there are some important differences in how your deposits are invested.
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Insurance
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Cash in bank accounts is insured by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Association (NCUA). Although there was a temporary exception instituted by the U.S. Treasury Department, deposits in money market funds generally are not insured and may lose value.
Use of Deposits
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Banks are restricted in how they may use cash deposits in bank accounts. The deposits are generally used in low-risk secured loans. Money market funds are less restricted and may invest in a number of short-term debt securities, such as short-term bonds, commercial notes and certificates of deposit (CDs).
Interest Rate
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Due to the increased restrictions on how bank deposits may be used, bank accounts generally offer a lower interest rate. The ability to use deposits to purchase unsecured debt securities allows money market funds to pass on a higher rate of return to depositors.
Account Restrictions
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Depending on the money market account type, the account may be restricted in important ways that you generally will not find with traditional bank accounts. Many money market accounts have high minimum balance requirements of $10,000 or above and the number of transactions you may execute in the account can be limited.
Uses
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Money market funds are generally used to store investment funds in a safe account. Often when you transfer cash to a stockbroker, it will be invested automatically in money market until you decide how to invest it. A money market fund is also the default investment for most 401k plans. They can also be used to generate fixed interest income in a low-risk manner, similar to traditional bank accounts.
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