Know Your Money Market: Accounts Versus Funds
Do you have cash that you want to keep accessible and safe, while earning a little more interest than the current, abysmally low savings account interest rates?
If you hear advice to put your funds in the "money market," be certain that you understand the distinction between a money market account and a money market fund.
Money market accounts FDIC insured
A money market account resembles a regular savings account and is FDIC insured. It usually offers a higher interest rate and, in return, requires a higher minimum balance, typically $1,000 or more.
Your cash is not tied up for months or years, as with certificates of deposit, and will provide a relatively good return, providing you shop around and continue to monitor your account. While the interest rate advantage over a savings account seems minuscule, it is nonetheless real. As of mid-March 2010, the FDIC national rate was 0.21 percent for savings accounts versus 0.31 for money market accounts.
Money market funds: Not so safe anymore?
Money market funds were developed and became popular among small investors in the late 1970's and '80's, when their interest rates outran the inflation of that period and provided relative safety. Their money was invested in aggregated pools of corporate or government bonds, Treasury securities and short-term certificates of deposit.
While these funds might have seemed safe, they are not guaranteed by the FDIC should the underlying assets fail. Thus, the money market funds' sponsors worked to keep a fund's share price above $1 - and while sponsors did not explicitly guarantee that stability, they usually stepped in to rescue a fund if its share price fell to near $1.
Following the 2008 Lehman Brothers bankruptcy, however, this premise of safety disappeared. Fund sponsors and federal regulators thus continue to search for some means to bolster money market funds and ensure a stable share price for investors in spite of debt markets' ongoing increased volatility.
While seeking savings and investment products, which inherently adjust to new conditions, always stay informed and do your research before you commit your money.
