How Are Money Market Funds Different

Money market funds give you a chance to build a corpus through lower risk securities investment. This is a variation on the highly popular mutual funds. Risk associated with them is low as these do not come with a federal insurance. Typical investment in them relates to government securities, deposit certificate, company commercial papers, and other low-risk high liquidity securities. The Net Asset Value (NAV) remains static in such cases with fluctuating yields. Investor losses though rare are not unique in relation to money market funds. Company Investment Act (1940) regulates such investments.

Money Market vs. CD

  • Certificate of Deposit (CD) are safer investments compared to money market funds. In case the bank fails, CDs remain insured under federal insurance acts allowing recovery of money to a certain extent. There is no such cover available for MMF so there is a chance of loss present even if negligible.
  • Many present in your certificate of deposit is not available for liquidity anywhere anytime. There are heavy penalties if you try to withdraw funds before the maturity period. You can shift money from MMF to other accounts or invest elsewhere according to the need without any restrictions.
  • For CDs, the return depends upon the duration of investment. Interest rates naturally are higher if you leave the money alone for a longer period. However, there are no such fixed returns related to MMF and generally, the interests paid varies between 1% and 6%.
  • You do not have to pay any maintenance fee for certificate of deposit investments. If you keep the money aside for the duration of the investment, you are welcome to do so without any extra fee charges. MMF on the other hand will charge you approximately 0.5% maintenance fee.

Money Market vs. Savings Account

  • There is withdrawal restrictions related to MMF with is generally 6-times on a monthly basis. With savings accounts, you do not have to face any such restrictions related to withdrawal.
  • Interest rates related to MMF are higher than savings account. Again, there is a minimum balance restriction for opening a money market fund, which is not present with the other.
  • Those who are looking for liquidity options related to their investment can do well with a money market fund. Here the flexibility is higher compared to any savings account, which does not render itself as easily to liquidity options.

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