What is a money market fund?

Most people think that  money market fund is the same as money market deposit accounts, but the truth is that these are two different types of investments.

A money market bank deposit account and a money market fund are similar in one aspect – they are invested in the short term, typically on fixed income investments such as the US Treasury Bills. Both of these accounts mature at less than a year – that means any investor can take home their profit for only a short period of time. Of course, the main advantage of these investments compared to a normal savings account is that they have higher interest rates and are relatively low-risk. Also, most financial institutions offering money market deposits and money market offer linked checking accounts, thereby increasing liquidity of these investment tools.

On the other hand, the primary difference between money market funds and money market deposit accounts is that the former works a lot like a mutual fund. They are not insured by the FDIC because they cannot be considered as bank accounts (unlike the money market deposit accounts which are in fact savings accounts, but interest rates rely on the rates in the money market). Like all the other mutual funds based on bonds and stocks, money market funds incurs charges which are typically deducted from the investor’s money thus its value depreciates. The price per share is usually fixed at $1 but fund companies are not obliged to keep the price constant.

There are times when the standard cost per share which is $1 could fall down; this phenomenon is called breaking the bucks. This actually took place when a financial crisis hit the US in 1998. By allowing the NAV to fall below $1, investors can get a better picture of the market and take the necessary steps in securing their investments.

It might take some time and a great deal of study before one can finally understand what a money market deposit account can do and money market fund really is. They both are offered by the same financial institution so better ask the bank experts before choosing what to buy. Know all the aspects; rules, prospective, fees and policies. It would also be helpful with your decision-making when you try to compare these two products and have a careful analysis of the benefits and drawbacks of each. Bear in mind that you are investing your money so don’t be too lax with these important details.