The interest a money market deposit account yields increases and decreases with current money market rates, which are usually reset weekly. Rates are generally below that of a CD because your money is more liquid. Ideally, these accounts pay a higher interest rate than traditional savings accounts in return for the increased balance requirement and the limited withdrawals. However, with the current low interest rate environment, most money market deposit accounts are offering about the same yield as a traditional savings account. Like other deposit accounts offered by banks, a money market deposit account is generally insured for up to $250,000 per depositor, per insured bank for each account ownership category, by the Federal Deposit Insurance Corporation. Be careful here, because accounts in each account category are combined to determine your coverage. You can verify your coverage limits at www.FDIC.gov.
These deposit accounts should not be confused with a money market mutual fund. A money market fund is a short-term investment product designed to be a low-risk, low-return investment, which invest in short-term, fixed-income securities.
The critical difference between the two is that money market mutual funds are not insured or guaranteed by the FDIC or any other government agency. While a bank may offer a money market mutual fund product, it is still an investment, meaning you could lose money. Some money market mutual funds may carry private insurance to protect your principal. However, an insured fund will generally offer a lower yield compared to an uninsured fund.
As with other mutual funds, money market mutual funds pool investors’ assets and invest in a portfolio that is managed by a professional with the intent of meeting stated goals. Money market mutual funds intend to preserve your investment at $1 per share. Some money market mutual funds may offer a higher interest rate than others because their underlying investments have a higher risk. It is imperative that you review the fund’s policies, fee structure and prospectus before making an investment.
If you choose to engage in a money market account at your bank, you need to pay close attention to whether it is a money market deposit account or a money market mutual fund.
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The MDJ will periodically publish columns from KSU business faculty.