Money market account vs. money market fund: What's the difference?

If you have a lump sum of cash sitting in a checking or traditional savings account, you could be missing out on higher interest rates.

Putting your money into a money market account or investing in a money market fund can be low-risk ways to get more from your money and hedge against inflation. However, though they have very similar names, money market accounts are very different from money market funds.

In this breakdown of money market accounts vs. money market funds, learn how these savings vehicles differ in terms of returns, account minimums, benefits, and risks.

What is a money market account?

A money market account is a type of deposit account available from many banks and credit unions. They usually pay a higher rate of interest than typical savings or checking accounts. Here’s a look at the average rates on these common deposit accounts as of March 2024, according to the FDIC:

• Interest checking: 0.07%

• Savings account: 0.47%

• Money market account: 0.67%

Read more: The best money market rates available today

Unlike savings accounts, money market accounts give you check-writing privileges, so you can occasionally use your account to pay bills or transfer money. They may also come with a debit card.

As deposit accounts, money market accounts opened with federally insured banks or credit unions are protected against bank closures. Your deposits are backed, up to a maximum of $250,000, by either Federal Deposit Insurance Corporation (FDIC) coverage or the National Credit Union Share Insurance Fund (NCUSIF).

What is a money market fund?

Though the names are similar, money market funds are quite different from money market accounts. Money market funds are not deposit accounts; they're a type of mutual fund, an investment fund that pools money from multiple investors to invest in a basket of securities, such as stocks or bonds.

Money market funds invest in short-term, liquid securities, such as commercial paper (unsecured corporate debt) or certificates of deposit (CDs). To invest in a money market fund, you must have an eligible investment account with an investment firm or online broker.

Money market funds tend to be lower-risk investments than other mutual funds, and they're typically used to store cash or as an alternative to traditional stocks. As an investment fund, money market funds can have higher returns than money market accounts, but they also

involve more risk.

As a type of investment, money market funds are protected by Securities Investor Protection Corporation (SIPC), a government corporation that protects investors who have money with financially troubled brokerages. SIPC protects up to $500,000 ($250,000 maximum for cash).

Money market account vs. money market fund: Key differences

When deciding between money market funds vs. money market accounts, understanding the key factors that differentiate them can help you choose what to do with your excess cash:

• Availability: Money market accounts can be opened through a bank or credit union, while money market funds are only available from investment firms. To invest in a money market fund, you'll need a brokerage or retirement account.

• Insurance: Money market accounts are backed by FDIC or NCUSIF insurance, but money market funds are not. Money market funds are investments, not bank accounts, so they are protected by SIPC.

• Returns: In general, money market funds have higher returns than the APYs on money market accounts.

• Initial investment: Money market accounts usually require larger initial deposits than money market funds. While you can often invest in a money market fund with about $2,000, money market accounts often require $6,000 or more to earn the highest advertised rate and/or avoid fees.

• Risk: With a money market account, interest rates may fluctuate, but your account won't lose value. By contrast, money market funds have some risk; you could lose money if market conditions change.

• Fees: Money market accounts usually come with monthly fees, which may be waived if you meet certain balance requirements. Money market funds involve expense ratios, which are a percentage of the assets invested that go toward the investment firm's administrative and management expenses.

• Taxes: Some money market funds are tax-exempt, such as those made up of municipal bonds. But the interest you earn in a money market account is taxable as income.

FAQs

Is a money market fund better than a money market account?

Whether a money market fund is better than a money market account depends on your goals and risk tolerance. Money market funds are relatively low-risk investments, but there is some risk of losing money. However, they usually provide higher returns than money market accounts and usually have lower account minimums.

If you can’t stomach taking on any risk, a money market account could be a good alternative. You'll earn a higher APY than you'd get with a traditional savings account without the risk of market changes affecting your account value.

What are the downsides of money market funds?

Money market funds typically provide higher returns than deposit accounts, but there are some downsides to keep in mind:

• Risk: Money market funds can lose money if the underlying securities in the fund drop in value.

• High investment minimums: Unlike high-yield savings accounts, which can often be opened with as little as $5, money market funds have higher investment minimums. You'll usually need at least $2,000 to invest in a money market fund.

• Fees: Money market funds involve expense ratios, which range from 0.10% to 0.76% of your invested assets. Depending on your balance, the fees could be substantial.

Is it good to keep money in a money market account?

Money market accounts can be useful account options if you have excess cash you need for a short-term goal, such as an upcoming major purchase or dream vacation. Money market accounts usually have higher APYs than savings accounts and come with check-writing capabilities and/or a debit card.