Comparing Money Market Accounts and Money Market Mutual Funds

Cash on hand is essential to smooth business operations, emergency response, and even taking advantage of expansion opportunities. With modern investment options, reserve cash can also generate a return without sacrificing liquidity.

Money Market Accounts and Money Market Mutual Funds are two of the most common investments for business cash. While the names of these investments are similar, they are very different products, and it is important to understand their differences before choosing between them.

What Are Money Market Accounts?

Money Market Accounts are a type of deposit account offered by banks and credit unions. They emerged in the early 1980s in response to regulations that limited the interest rates banks could offer for checking and savings accounts. Money Market Accounts share some features with traditional deposit accounts while providing unique enhancements.

Like savings accounts, withdrawals from Money Market Accounts were historically limited – usually to 6 transactions per statement period. The regulation requiring these restrictions was eased during the COVID-19 pandemic, and financial institutions now have the option to allow unlimited transfers.

While the number of transactions is still limited at some banks, Money Market Accounts typically provide easy access to funds through online transfers, debit cards, and check writing privileges. In this way, they are similar to checking accounts.

Money Market Accounts are designed for medium- to long-term investment but are not subject to a set investment term.  As such, there are no early withdrawal penalties like with Certificates of Deposit [CDs].

Returns for Money Market Accounts vary based on the financial institution that issues the account. Due to the longer-term nature of Money Market Accounts, they tend to provide higher rates of return than checking accounts. On the other hand, their relative liquidity means returns often fall short of what a business could earn with a CD.

What Are Money Market Mutual Funds?

Money Market Mutual Funds are a collection of securities packaged and sold as shares of a single investment – the mutual fund. The underlying investments in a Money Market Mutual Fund are often short-term, high-quality debt such as short-term bonds, commercial paper, and repurchase agreements.

These underlying securities generate income that is passed through the mutual fund to the shareholder – less the expenses of the fund. Because of this structure, Money Market Mutual Funds typically have similar yields to the prevailing short-term interest rates.

Contrasting Money Market Accounts and Money Market Mutual Funds

Both Money Market Accounts and Money Market Mutual Funds are intended to offer an interest-bearing safe haven for business cash. However, there are several key differences between these types of investments.

Money Market Accounts are Insured by the FDIC While Money Market Mutual Funds Are Not

Safety for reserve cash is a top priority for businesses and Money Market Accounts issued by FDIC member banks offer the ultimate protection – FDIC insurance. This coverage protects up to $250k per ownership category at each bank from bank failure. The FDIC is backed by the full faith and credit of the United States government and since the program was established in 1933, no depositor has lost a penny of insured funds.

On the other hand, Money Market Mutual Funds are not issued by banks, so they are not insured by the FDIC. They are, however, covered by SIPC – a non-profit membership corporation that seeks to return securities to investors if the broker-dealer holding them fails. SIPC coverage extends to $500k in securities per ownership category at each member broker-dealer, including Money Market Mutual funds. Unlike the FDIC, SIPC is not a government agency and is not backed by the U.S. government.

Money Market Accounts Cannot Lose Value, but Money Market Mutual Funds Can

When a business deposits cash into a Money Market Account, they aren’t buying shares of a security. Therefore, the depositor can’t lose money based on changing market conditions, interest rates, or investor behavior.

Conversely, Money Market Mutual Funds are securities. Like other securities, the value of a Money Market Mutual Fund can change based on market factors. However, Money Market Mutual Funds are unique in the securities world because they seek to maintain a Net Asset Value [NAV] of $1 per share. This means that each share costs $1 and the fund manager works to preserve that value.

While rare, there are instances where Money Market Mutual Funds have deviated from their $1 per share value. For example, in 2008 a Money Market Mutual Fund that invested heavily in Lehman Brothers debt suffered losses when that debt became worthless. As a result, the value of the mutual fund declined from $1 to $0.97. This event became known as “breaking the buck” and it caused many investors to question the safety of their Money Market Mutual Funds.

In response to the “breaking of the buck,” the rules governing Money Market Mutual Funds were changed after the Great Recession and some no longer guarantee the $1 per share value. Instead, they adopted a “Floating NAV” which is subject to change with market conditions.

Money Market Accounts Do Not Have Expense Ratios, Unlike Money Market Mutual Funds

Since Money Market Accounts are not securities, they do not have fund managers, trading expenses, or overhead costs. Therefore, they do not charge investors for these services.

On the other hand, Money Market Mutual Funds do have various expenses which are covered by the fund’s expense ratio – the amount each investor pays for the upkeep of the fund. The average expense ratio for a Money Market Mutual Fund was 0.36% in 2023. These costs are deducted from the fund’s income and therefore reduce the amount of interest paid to shareholders.

Both Money Market Accounts and Money Market Mutual Funds are intended to provide a safe investment for cash. However, many businesses have far more cash than the FDIC or SIPC limit. Funds above the insurance limits are not protected and are therefore at risk if the institution holding them fails. Fortunately, there is a simple solution to achieve FDIC protection with all the benefits of a Money Market Account – professional deposit management services.

Earn More, Risk Less® With Deposit Management From ADM

At the American Deposit Management Co. [ADM], our deposit management services provide access to full insurance from the FDIC or credit union equivalent, NCUA – above and beyond the traditional $250k limit. We also provide access to liquidity to match your schedule and nationally competitive returns.

Our solutions are powered by a concept we call Marketplace Banking™. It allows us to spread millions in business cash across our nationwide network of financial institutions that compete for deposits. This concept allows our clients to reap the benefits of multiple banking relationships – including extended FDIC / NCUA protection – with one account and one consolidated monthly statement.

To learn how your company can achieve access to extended protection, contact us today.

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