Money market funds or money market accounts – the best option for you

Most often people tend to get confused with money market accounts and money market funds.  Money market accounts (MMA) are more or less like savings accounts and are advertised by banks.  In reality, they are very similar to the regular savings accounts.  The most distinguishing factors between money market accounts and money market funds are the factors of choice and risk.  This could be the single largest factor one will have to consider while investing – to protect their hard earned money.

MMA or Money Market Account:

The alternatives to money market funds are the Money Market Accounts offered by the banks.   The annual percentage yield (APY) is very good and the money is guaranteed and safe as it is FDIC insured.

The interest rates that are paid out are normally a bit higher than those offered in the normal savings accounts or it may be on par with the savings accounts.  Hence, while choosing the money market account instead of a regular savings account is to keep the check writing and debit card payments within limits.  Due to the ability to write checks, these money market accounts are seen as a cross between the checking accounts and the savings accounts.

Money market accounts also carry added restrictions such as limited number of transactions and higher minimum balances that need to be maintained.  However, sometimes one might see the tiered rate MMA’s, and these can carry much higher rates.

MMF or Money Market Fund:

A comparison between the money fund or the money market mutual fund, and the money market fund will show that these funds carry no FDIC insurance and it is only a collection of ‘short-term debt investments’ that are held by the mutual fund.  This fund is more about investments and less about deposits.  Here, you will only buy and sell shares and this is not something where you can withdraw and deposit money.  Investments made in these funds are put into debt securities that will mature in around 13 months.  In order to cut down the risk, the SEC requires an average maturity period of less than 90 days on investments in the money market fund.

While making investment decisions, like it was mentioned earlier, risk and choice play a crucial role.  This choice is not only limited to whether or not you should opt for the MMF or the MMA but also the type of MMF you purchase or the type you invest in.