Money Market Vs Certificate of Deposit, Which one is Most Advantageous?

One of the major dilemmas that all investors face is to decide which avenue of investment is better, offering higher yields with minimum risks. The two major investment choices are money market investments and certificate of deposits (CDs).

Certificate of Deposits

Certificate of deposits are basically a type of debt instruments that banks and other financial institutions issue to investors. The investors receive a fixed rate of interest for lending amounts to the institutions for mutually agreed periods of time. This period of investing in CDs could vary from a few weeks to even several years, known as maturity period of the CDs. Moreover, the interest rate that the investor earns usually increases proportionate to the period for which the investor places his money in the institution.

The main advantage of CDs is that the investor would be able to calculate the expected earnings at the initial stage of investment itself. Moreover, all CDs up to $100,000 are insured by FDIC, which is an ideal solution for seniors who could maintain their capital for later years of their lives. On the other hand, if the investor invests his money for longer periods in CDs, even though the interest rate is higher, the investor loses the opportunity of using his funds in alternative investment avenues that could offer higher yields.

Money Markets

Money markets are quite similar to CDS but one additional advantage with investment in money markets is a checking account. Money markets are very much like mutual funds, which attempt to maintain their share prices at $1, with the sole intention of increasing it above that value, while ensuring that it does not go below that value. When you deposit your funds in money markets, professional money managers handle your funds with great care by diversifying the investment in government T-bills, CDs, savings bonds, and other types of conservative and safe financial instruments. Thus, there is a balanced approach in money market investments, instead of putting all your eggs in one basket.

It is quite easy to open an account with providers of money market investment opportunities. They also provide a checkbook to the investors so that the investors could withdraw funds from the account whenever they need them. The main advantage in money market investing is that you have access to immediate cash either for emergency expenses or for alternative types of investments, since the money market account is just like your standard savings account or checking account. However, there would be a limit on the number of withdrawals in a single month. Further, the rate of interest in money markets is proportionate to the level of the assets deposited in contrast to the returns on CDs.