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Money market funds vs. money market accounts

Posted by Andrew Chan  January 13, 2009 02:30 PM

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What is the difference between a money market mutual fund and a money market deposit account?
Good question! As investors continue to move money into more conservative holdings such as cash and cash equivalent investments, it is important to understand the difference between a money market mutual fund (sometimes known as a money market fund or a money fund) and a money market deposit account.

Money market funds and money market deposit accounts are similar in that they both usually invest in short-term, fixed income investments such as U.S. Treasuries. By definition, short-term, fixed income investments are those with maturities of less than one year. Both money market funds and money market deposit accounts usually offer higher rates of return than traditional savings accounts due to the fact that the short-term investments they use have the potential for higher returns. Both types of investments offer flexibility and liquidity as you can often write checks against these accounts and make ATM withdrawals from them.

Despite these similarities there is one main difference between money market funds and money market deposit accounts. Money market funds are mutual funds and not bank accounts and are not normally insured by any government agency like the FDIC. Similar to other types of mutual funds like stock and bond funds, money market funds incur expenses (which are passed on to the fund's investors) and can decline in value. While the fund companies that offer money market funds try to maintain a net asset value (NAV) of $1 dollar per share, they are not obligated to do so. In fact, last fall, the value of one money market fund fell below the $1 dollar per share threshold (also known as “breaking the buck”). This event and the financial crisis prompted the U.S. Treasury to step in with a temporary guarantee program to reassure investors that they would receive their original investment value. Keep in mind that this program is temporary and does not cover all money market mutual funds. The only funds that are covered are those that chose to participate and pay the fee for the program. If you invested in a money market fund you should contact your fund company to see if they participated in the program.

Unlike money market funds, money market deposit accounts at chartered financial institutions are FDIC insured. Balances up to $250,000 dollars per depositor per bank are insured through Dec. 31, 2009. After that date, the FDIC insurance coverage will return to the previous $100,000 dollar level. Credit unions do not offer FDIC insurance but offer comparable insurance through the National Credit Union Administration (NCUA).

Investing in a money market fund or a money market deposit account can be confusing. In addition to having similar names, these investments are often sold at the same financial institutions. If you are considering investing in a money market fund it is important that you obtain and review the fund’s prospectus as you would for any other mutual fund investment. Be sure to understand the objectives, risks, fees, and expenses of these funds before investing. If you are investing in a money market deposit account you should make sure that you understand how to set up the ownership of your accounts to be fully covered by the FDIC or NCUA insurance offered with those accounts. In either case make sure that you fully understand the advantages and disadvantages of each product and how they meet your objectives before investing.

To learn more visit these web sites:
U.S. Treasury’s Temporary Guarantee Program for Money Market Funds (http://www.treasury.gov/press/releases/hp1161.htm)

FDIC Deposit Insurance (http://www.fdic.gov/deposit/deposits/index.html)

NCUA Insurance (http://www.ncua.gov/Resources/ShareInsurance/NCUAInsuranceFundFAQs.htm)

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
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