Money Market Deposit Account vs. Money Market Mutual Fund

There is a lot of confusion around money market deposit accounts and money market mutual funds. Many individuals mistakenly believe that a money market deposit account is a mutual fund or equity account. Money market deposit accounts and money market mutual funds are both considered cash equivalents, but read on and you’ll discover there are some important differences.

Money market deposit accounts offer the benefits of both a savings and checking account. The customer earns interest while still being able to write checks and withdrawal or transfer funds. They sometimes offer higher interest rates than a regular savings account, but the primary difference from checking accounts is that money market deposit accounts are  limited to six transfers or withdrawals per month  when transfer or withdrawal is made to another account of the same depositor at the same bank, or when they are made to a third party, by means of a preauthorized transfer or automatic transfers; telephone (including fax); or with the bank’s home or Internet banking service (such as Bill pay). Transfers to a third party are also limited to six per statement cycle if made by check, draft, or debit card (point–of-sale)

Accounts that exceed these limitations may be; subject to a fee and or closed. (Savings accounts; have transaction limits, as well. Checking accounts do not have; transaction limits) Money market deposit accounts are protected by the Federal Deposit Insurance Corporation (FDIC) when opened at a bank that is a member of the FDIC.

• Money market mutual funds seek to preserve the amount invested by maintaining a net asset value (NAV) of $1 per share. They may also produce a small, but not guaranteed, return for the investor. Portfolios are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments.  Examples include short-term obligations issued or guaranteed by U. S. Corporations or state and municipal governments, high-grade commercial paper, and U.S. Treasury securities. Money market mutual funds are not FDIC insured.

Money Market Funds are not appropriate for individuals that are seeking an investment that is likely to significantly outpace inflation, investing for retirement or other long term goals and/or, investing for growth or maximum current income.

In summary, a Money Market Deposit Account or Money Market Mutual Fund may be a good fit for you if you require stability of principal, are seeking an investment for the cash portion of an asset allocation program, are looking for an investment with a lower degree of risk during uncertain economic times or periods of stock market volatility, and/or consider yourself a saver rather than an investor.

It’s important to keep in mind, investing involves risk, including potential for loss.

An investment in a Money Market Mutual Fund is not insured by the Federal Deposit Insurance Corporation or any other government agency and is not an obligation of a bank or guaranteed by a bank. Although the Fund seeks to preserve the value of your investment at $1.00 per share, these funds are subject to investment risk, including  possible loss of principal invested.

Diversification and asset allocation do not assure a profit or protect against loss. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations. Bonds are subject to interest rate risk and may decline in value due to an increase in interest rates. The S&P 500® Index tracks the common stock performance of 500 large U.S. companies.

Source for concepts included in this article: Back Room Technician, courtesy of Advisys, Inc.

AP2011/11/1069