The money market fund and the money market account have a lot of similarities that many people confuse both. The truth is that the two concepts are different both and any good investor should know what these two have in common and their differences. At the end of this post, you should be able to distinguish between a money market account and money market fund. This will help you make an informed decision on which of the options to go for.
What is a Money Market Account
A money market account is a typical bank account which you open with a bank or a credit union. The money market account has shared some similarities with checking and a savings account. You get to make use of a check just like with a checking account and you are paid interest for maintaining a money market account just like a savings account. Another similarity that a money market account has with a savings account is that there is a limit to the number of withdrawals you can make in a month. There is a limit of six withdrawals via electronic transfer. Also, the funds in a money market account are insured up to $250,000. The insurance is offered by the Federal Deposit Insurance Corporation for banks and National Credit Union Administration for credit unions.
What is a Money Market Fund
A money market fund is issued by investment banks and brokers. It is short-term security that comes with low-risk. These investment banks pool these funds from investors to invest in low-risk investment options like Commercial papers, Certificates of deposits and Treasury Bills. The duration for money market fund is usually short-term. Most times, the maturity period is within 12 months or below that.
Similarities between the Money Market Account and the Money Market Fund
One feature that a money market account has with a money market fund is that both account holders are entitled to interest. This interest is paid periodically and the interest rate varies depending on the duration or maturity period and the issuer.
Both types of investment options come with a very low-risk. The probability of losing your investment is very low. Also, money market account provides and an extra layer of safety for account holders with the FDIC insurance.
- Low-Interest Rate
One thing that is common with most low-risk investment options is that they come with the very low-interest rate. The interest rate of both types of investments is very low when compared to interest from a stock investment.
The money market fund and the money market account are both liquid in nature. This means that you have easy access to your cash whenever you have a need for it.
Difference between the Money Market Fund and the Money Market Account:
a. Money Market Account: The money market account is issued by banks and credit unions.
b. Money Market Fund: The money market fund is issued by brokers or investment banks.
a. Money Market Account: The FDIC offers insurances for money in a money market account up to $250,000.
b. Money Market Fund: The money market fund does not enjoy such benefits. This makes it a riskier option.
3. Returns of Investment
a. Money Market Account: The money market account typically offers a lower interest rate. The interest rate for a money market account starts at 0.17% and can go as high as 2.1%.
b. Money Market Fund: This type of account has a higher interest rate. The interest rate for a money market fund can go as higher 3% and above.
4. Limit to Number of Transactions
a. Money Market Account: There is a limit to the number of electronic transfer in a month for a money market accountt.
b. Money Market Fund: There is no limit to the number of withdrawals for this type of account.
a. Money Market Account: The money market account does not come with any fee or charges on withdrawal.
b. Money Market Fund: Money market fund attracts fees like the liquidity fee. The liquidity fee is the money you pay when you convert your funds to cash. This fee is in line with the U.S Securities and Exchange Commission Rules.
These are the similarities and difference between both concepts. With this information, you should be able to make an informed decision.