Will the debate between CD’s and money market funds ever cease?

When you decide to invest your money, you will always be faced with a number of options. The certificates of deposits or CD’s are very conservative investment options compared to the more dynamic money market funds. We shall now look at different features of each of these accounts and compare the two.

Security is one of the most basic criteria that anyone would have to take into consideration. Both the CD’s as well as the money market accounts are insured by the FDIC of federal deposit Insurance Corporation. You will get coverage of up to $250000 with this insurance. But money market funds are not insured by any sort of corporation and hence you are exposed to the risk of having to lose your principle amount if the corporation were to go bankrupt.

Rate of return is another criterion that you need to think about. Certificates of deposits will provide a fixed rate of return for a fixed amount and a fixed time period. However there are a few CD’s that offer variable rates and withdrawal or deposit option, but again your interest rate will be more volatile. A money market fund on the other hand will promise any where up to 3.5% at times, but this is just the anticipated rate of return.

Money in the CD is never liquid. You can get liquid CD’s that allow you to withdraw or deposit a set number of times every time period, but the interest rate will be lesser than a conventional CD. A money market fund on the other hand is also not so liquid. But you can write checks to withdraw cash whenever you need it. But again, the number of times that you can make a withdrawal is limited and you will also have to make sure that you are above the minimum balance requirements to avoid penalties.

Interest will be paid to you every month from a money market account. But certificates of deposits on the other hand will pay you the interest only at the end of each time period which can vary from a few weeks to up to six years.

The rate of return on a certificate of deposit will be fixed at the beginning of the term. You can get varying rates if you go for a bump up CD or a step up CD. The interest rate on a money market fund on the other hand will vary with varying market conditions.