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There’s a difference???


Last Money Monday, we talked about Money Market Accounts and how they are a safe place to park your money but offer a very limited return.  Often confused with Money Market Accounts are Money Market Funds.  Though they both have “money market” in their name, they are definitely different types of accounts and you need to know the difference if you plan to place your money in either.  Let’s look at what a Money Market Fund is…

What is a Money Market Fund?

A Money Market Fund, also known as a Money Market Mutual Fund, is a kind of investment fund that provides high liquidity with very low risk.  What does “high liquidity” even mean?  This is the very smart-sounding way to say you can get your cash out of it quick.  You can get your money out of the account within a few business days.  And the “very low risk” part…this just means that the chances are so low of losing money, that these are a safe place to temporarily put your money.

Money in Money Market Funds are typically invested in cash, cash-equivalent securities, or high-quality, short-term debt like U.S. Treasuries or Certificates of Deposit (CD’s).  These are all pretty safe, short-term areas where money can be placed.

You mentioned “temporarily” putting money there…

That’s right.  Money invested in Money Market Funds are typically only placed there for a short amount of time.  These types of funds, though safe and easy to get in and out, offer a very low rate of return on your money.  It’s true that they can be slightly better than Money Market Accounts, but they are still a pretty crappy place to put your money for your long-term investment goals.

For these reasons, most investors temporarily park their money in these types of accounts until they find a better, long-term investment that will provide a greater return.  These types of funds are NOT suitable for long-term investment goals like retirement planning.

Pros and Cons

The benefits of having a Money Market Fund include:

– high liquidity;

– very low-risk of losing money;

– typically better return than standard bank accounts.

The down side of these funds are:

– not much return on investment (capital appreciation);

– sensitive to interest rate fluctuations;

– NOT FDIC-insured;

The NOT FDIC-insured is a big one. Money Market Accounts, Certificates of Deposit, and regular bank accounts, like checking and savings, are all FDIC-insured.  To be FDIC-insured means that the amount of money in each account is insured by Federal Deposit Insurance Corporation up to $250,000.  This way, if something goes wrong, you don’t lose your money.  But since Money Market Funds are not FDIC-insured, there is a small risk you could lose your money if the company your Money Market Fund is with goes belly-up.

The Takeaway

Money Market Funds are a great place to temporarily put your money while you’re figuring out a better long-term place for it.  They are low-risk, with high liquidity, that typically provide a better return than standard bank accounts.  Though they can be a great place to put your money, you don’t want to keep it there as they’re NOT FDIC-insured, and the rate of return on them is very small.

The great thing about these funds are their high liquidity.  You can get your money out of them in just a few business days.  So, many investors temporarily park money here to keep it pretty safe, with a small rate of return, until they find a better long-term investment with a better return.  You may want to consider how Money Market Funds can help you with your investment goals.

For the record, I, the 5and2Guy am NOT a financial advisor.  The information in this post is meant to give you some basic information and for entertainment purposes only.  I strongly suggest you talk to a certified financial advisor for all your investment needs.

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