How do money market accounts work?

A money market account is an investment option that provides much greater returns compared to a traditional savings bank account. In fact, they provide better returns than a certificate of deposit.

Money market accounts have a minimum investment requirement of around $10000. This can vary depending on the type of fund you decide to settle for. They will allow you to withdraw money only around six times a month. If you wish to withdraw more often, you will need to pay a penalty for the same. And similar to a checking account, the money market account will let you write up to three checks in a single month.

With a traditional savings bank account, the money invested in the account will be insured by the FDIC or Federal Deposit Insurance Corporation. The limit is up to $100000 as a principle deposit amount. This means that even if the bank were to go bankrupt, you will still get your principle amount back in full or if the amount is less than $100000. The FDIC was created back in the early 30’s to prevent people from losing money if banks were to go bankrupt. With credit unions, the account is protected by the NCUA or the National Credit Union Association. But with a money market account, you will not get such insurance.

When you invest in a money market fund, your money will be transferred to a money manager or a fund manager. This manager will be in charge of a large amount of money from a lot of different investors. He will then take a call as to which investment option to go for based on the current market trends. If the market is doing well, you will reap the benefits of the fund, but if not, everybody has to take the hit. Obviously, if the fund does, well the manager will receive a bonus, which will be deducted from the money that you have invested. This is called the money managing fee or expense ratio, which can go up to 0.5% on the principle amount that you have invested.

It is important to be aware that if the market is not doing well, you will have to take the hit. In such situations, the damage may be so great that you might not get your principle amount back in full. If you go for funds that have assured returns, you will obviously get a lower interest rate. But this is a much safer option.