What Is a Money Market Account?
Money market accounts are the same as savings accounts but typically have a higher rate of return.
It comes from credit unions, banks, and other financial institutions. Also, they generally have limited withdrawal, check-writing, and transfer allowances.
Opening a money market account does not buy the money market securities. But the bank or other financial institutions own and trade those securities.
The deposits in a money market account are up to $250,000 and are insured by the National Credit Union Administration or FDIC.
However, money market accounts incur fees to offset their higher rate of return. To avoid these, you need to keep a high balance.
How Does a Money Market Account Work?
Money market securities are considered fixed-income securities that function as IOUs.
The purchaser gains a modest amount of interest, and the seller swears to give back the principal of the money market security at a later date.
The money market is very fluid, and they have few maturities.
The examples involve US Treasury bills (T-bills), short-term certificates of deposit (CDs), repurchase agreements, and commercial paper (short-term unsecured loans by companies that need to increase money.
Money Market Account Rates
Generally, the finest money market account rates apply to customers who are willing and capable of making large deposits.
But since money market account rates are low, there is less variation than you believe.
It is important to read the fine print and not just the stated rate when shopping for a money market account.
Several money market accounts occur with introductory rates that fall after a specific period.
It is important to also look for the rate you will earn after any introductory deals expire, known as the "ongoing rate."
Thus, keeping an eye on minimum deposit and monthly balance requirements is a good plan when shopping for a money market account. You incur fees that eat into your savings when you fail to meet either requirement.
What Is a Mutual Fund?
Mutual Funds are pools of money accumulated from numerous investors to invest in bonds, stocks, or other securities.
They are managed by professionals and are also owned by a group of investors.
Mutual funds provide small or individual investors access to portfolios of bonds, equities, and other securities that are managed professionally.
Therefore, each shareholder participates somewhat in the gains or losses of the fund.
Mutual funds are invested in many securities, and performance is typically tracked as the change in the fund's total market cap.
A portfolio of mutual funds is structured and maintained to equal the investment objectives stated in its prospectus.
How Do Mutual Funds Work?
When you invest in a mutual fund, your money is pooled with other investors.
The money will buy stocks, bonds, and other securities that match the fund's investment objective.
The value of your investment will either go up or down as the securities fluctuate.
For instance, if you have a mutual fund that invests in stocks and the stock market goes low, the value of your investment will also go low.
The Bottom Line
The main difference between a money market account and a mutual fund is that a money market account is an interest-bearing account with check-writing abilities.
In contrast, a mutual fund is an investment vehicle that pools money from many investors to purchase stocks, bonds, or other securities.
The money market account and the mutual fund have pros and cons, but eventually, it will come down to your individual needs as an investor.
If you ask for easy access to your money and want the safety of FDIC insurance, a money market account may be the better option.
However, a mutual fund may be the way to go if you want higher potential returns.
FAQs
1. What is a Money Market Account?
A money market account is an account with interest-bearing that offers check-writing abilities and easy access to your money.
2. What is a Mutual Fund?
A mutual fund is an investment vehicle that pools money from many investors to purchase stocks, bonds, or other securities.
3. What are the benefits of a money market account?
Some benefits of a money market account include easy access to your money and the safety of FDIC insurance.
4. What are the benefits of a mutual fund?
Some benefits of a mutual fund include the potential for higher returns and professional management.
5. What are the risks of a money market account?
Some risks of a money market account include low-interest rates and fees for not meeting minimum balance or deposit requirements.
