Money market funds vs. money market accounts — Which is better?

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Published on July 26, 2023 | 4 min read

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It might be easy to get money market accounts and money market funds confused. After all, they sound so similar. But the two types of financial products have plenty of key differences, notably around which is protected by the FDIC against loss. But which is better for you?

Here are the pros and cons of money market funds and money market funds, and how they compare to one another.

Money market account vs. money market fund

Despite the similar names, money market funds and money market accounts are quite different.

A money market account is an interest-bearing deposit account at a financial institution. It’s a savings account, but some banks and credit unions offer money market accounts with checking account features. The account often has a limited number of withdrawals per month, and they may require higher minimum balances than savings accounts do.

Money market accounts can earn competitive, but variable, interest rates, and the account often comes with a debit card or checks. And if the account is offered at an FDIC-insured financial institution, then it has FDIC protection up to $250,000 per depositor per account type.

In contrast, a money market fund is an investment option at many banks and brokerage firms. Also called money market mutual funds, these investments can pay a competitive interest rate and can act as an attractive, low-risk place for investors to park their cash when not invested.

By law, money market funds must invest in short-term debt such as U.S. Treasury bills, certificates of deposit and short-term corporate debt. With all its holdings averaged together, the fund’s holdings must have a maturity of 60 days or less, helping to keep money market funds highly liquid and accessible as a short-term investment.

Unlike money market accounts, money market funds charge a fee for holding its investments. Called an expense ratio, this fee is based on the amount of money invested in the fund. The average annual fee was about 0.13 percent in 2022, according to a report from the Investment Company Institute. So it would cost an investor who held $10,000 in the fund for a year $13.

Money market funds are typically priced at $1 per share, though during extreme market turbulence the funds may fall below that price and investors may lose money.

Pros and cons of money market accounts and money market funds

Pros of money market accounts

Interest-bearing: Money market accounts can pay attractive interest rates on your cash balance and may pay better than similar checking or savings accounts.
FDIC protection: Money market accounts through an FDIC-insured bank are guaranteed against loss up to $250,000 per depositor per account type. So you run no risks with your money here.
Ability to spend from a savings account: A money market account allows you to spend while enjoying a competitive yield on your cash.

Cons of money market accounts

Limited withdrawals: While you can spend from a money market account, the account is really designed to be a checking account. Many banks limit the number of withdrawals you can make in a month, often to just six.
Higher minimum balance requirements: Money market accounts may impose higher minimum balance requirements, compared to traditional savings accounts.
Variable interest rate: The interest you earn on a money market account will vary based on the prevailing interest rate, meaning it could go down (or up) if overall rates move down or up. If you’re looking to lock in a rate, go with the best CDs.

Pros of money market funds

Interest-earning investment: Money market funds may earn an attractive interest rate, but one fund can differ from another, so you’ll need to research what you’re purchasing. The rate will also change depending on the prevailing interest rate.
Limited risk: These funds have limited risk because of the nature of their short-term investments, but there’s still some risk. If debt markets experience turbulence, some investors may lose money, though this has been quite rare.
Highly liquid: These funds own liquid assets, and you can buy or sell them whenever the market is open, meaning they’re a ready source of cash for you.
Good for short-term cash: Money market funds can be a useful place for short-term money, such as an emergency fund, if you need it quickly.

Cons of money market funds

May not out-earn inflation: Money market funds return cash on your investment, but they don’t guarantee to beat inflation. It may be a good or bad time to buy money market funds, depending on the overall rate environment, and rates on money market funds will fluctuate.
Not appropriate for long-term investments: The returns on money market funds have historically been much less than high-performing stocks, and since money market funds may not outpace inflation, you may lose purchasing power over time.
Not FDIC-protected: Unlike money market accounts, these funds are not protected by any kind of insurance, so you could lose principal, though it’s rare for this to happen.
Fees: Because it’s a mutual fund, you’ll need to pay an expense ratio to own the investment. The fee will vary, depending on the fund, so you’ll want to find a fund with a low fee and a high rate of return.

Money market funds vs. money market accounts – which is better?

Money market accounts and money market funds have different purposes, meaning they’re designed to appeal to individuals with different needs. So which account is better depends on your individual financial situation.

A money market account is the right pick for individuals looking for an FDIC-insured account that may offer attractive rates of interest and the ability to spend from the account, if desired. It can form the basis of an emergency account and act as a savings account with better features.

In contrast, money market funds are typically used by investors in brokerage or other financial accounts when they’re looking for an attractive short-term yield. For these individuals, money market funds are often a place to park cash and earn a decent return while they wait for a more attractive investment elsewhere, perhaps in the stock market.

Bottom line

A money market account can be an attractive option if you’re looking for a competitive yield on a safe bank deposit and the ability to write checks. In contrast, a money market fund is a better option for investors looking for yield on a relatively low-risk investment at a brokerage or bank.