Q: I’m interested in opening a money market account to earn a little extra interest on my savings, but I’m confused: Is there a difference between a money market savings account and a money market fund?
Understanding the difference between a money market savings account and money market fund (MMF) is key, because while they sound like the same thing, these two investment tools are very different from one another. Below is a look at how a money market account and MMF differ.
What Is a Money Market Savings Account?
Sometimes referred to as a money market deposit account (MMDA), this particular type of account is a lot like a traditional savings account. In fact, there are only a few subtle differences between a money market account and savings account, most of which come down to interest rates and restrictions put in place by the individual bank or credit union.
The most important thing to remember is that an MMDA is, in fact, a deposit account, which means it’s held at a bank or credit union and the principal is protected by the FDIC or NCUA up to federal limits, as long as the institution is federally insured.
What is a Money Market Fund?
A money market fund, on the other hand, is not a bank account but rather a type of low-risk mutual fund that offers very modest returns. According to the FDIC, money market funds “typically invest in government securities, certificates of deposit, commercial paper of companies, or other highly liquid and low-risk securities.”
MMFs are held in investment portfolios and serve as a place to park cash that isn’t currently invested in another fund or security. That means these accounts are also subject to loss on principal (though rare) and are not protected by the FDIC.
If your goal is to earn higher interest on your savings, a money market savings account is the right choice for you. Money market funds are better served as one piece of a larger investment portfolio.