What is the difference between money market accounts and savings accounts?

A money market account is a deposit account offered by banks, in which the invested amount is reinvested in corporate paper and government securities, and the investor is paid interest according to the ruling interest rates in the money markets. A savings account is a regular deposit account with low interest. Every individual adult has at least one savings account, but it is also true that a significant amount of investors’ savings is held in money market accounts. Although both sound similar, yet there are significant differences between money market accounts and savings accounts.

Rate of Interest 

The similarity of both accounts is that the interest is compounded on a daily basis, and at the end of the month, the interest is credited to the account. But in terms of the rate offered, money market accounts offer slightly better rates of interest. This is because they have a little more choice in the investments they are allowed to make, and so can attempt to generate better return on investment. Also, the rate of interest generally is structured in slabs, with higher interest being given for higher balances kept in the account.

Minimum balance 

Money market accounts invest your invested sum in a slightly different manner as compared to a savings account, hence they have higher requirement of monthly balances. You have the option of paying a charge if you want to maintain your account balance below the specified minimum balance.

Access to funds 

The funds kept in a money market account are invested in a slightly different way as compared to the funds kept in a savings account. Hence banks try to limit the frequency of your access to your funds so that they can invest in higher yielding coupons of longer tenure. They do this by putting a cap on the number of withdrawals you can make from your money market fund in a month. Comparatively, access to your funds is easier in a savings account.

Transaction 

Many people erroneously think of the money market fund as a checking account, but actually it is closer in nature to a low transaction savings account, since it pays interest unlike a checking account. Therefore most cash and non cash transactions in a money market account are as restricted as in a savings account. This limit could either be in terms of volume of transactions per month or number of transactions per month, and if these limits are exceeded then charges are deducted from the account in the subsequent month.