Are All Money Market Accounts in a Mutual Fund & Are These Funds Covered by FDIC?
Not all money markets are in mutual funds and the ones that are do not enjoy the protection of the Federal Deposit Insurance Corporation or any other government backed entity. Between 2008 and 2009, the U.S. Department of Treasury established a guarantee fund to back assets held in money market mutual funds in response to a a dramatic market downturn. That fund ceased to exist when markets stabilized and no mutual funds currently have backing from the federal government.
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Differences Between Money Markets
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Mutual funds are professionally managed portfolios of investments that contain an array of different securities. Money market funds typically contain U.S. Treasury bills and bonds along with negotiable certificates of deposit. Each fund has a minimum deposit amount and these range between $1,000 and $1,000,000.
Financial institutions have savings accounts called money markets which tend to pay higher interest rates than regular savings accounts. Most money markets have minimum balance requirements of $5,000 or $10,000.
Principal Guarantees
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Money market savings accounts, like other standard bank products, do not have fluctuating values. Account holders earn interest, normally accrued annually but paid monthly, on funds that they deposit in the account.
Money market mutual funds have no principal guarantees because like all mutual funds, the share prices are based upon the value of the underlying assets, which are subject to daily change. However, fund managers attempt to maintain the net-asset-value of shares at $1.
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FDIC Coverage
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The FDIC protects assets held in all bank accounts including money markets but only to a maximum amount of $250,000 for each account owner at any one bank. The FDIC also provides coverage for certificates of deposit including CDs that are sold on the secondary market. Many of these CDs are held in money market mutual funds but the FDIC coverage does not extend to the shareholders because they own the fund rather than the actual CDs.
Other Considerations
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Not all money market savings accounts are eligible for FDIC insurance. Some banks are not FDIC members and customer deposits are therefore unprotected. Credit unions are not FDIC members but many are part of the National Credit Union Administration. The NCUA, began operations in 1970 and insures deposit in the exact same way as the FDIC. Many credit unions are not members of the NCUA. Generally, these credit unions buy insurance protection from non-profit state-run deposit guarantee funds.
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