For businesses, cash on hand is essential to smooth operations, emergency response, and even taking advantage of expansion opportunities. With modern investment options, reserve cash can also generate a return without sacrificing liquidity.
Two common investments for cash are Money Market Accounts and Money Market Mutual Funds. While the names of these investments are similar, they are very different products. Before choosing between them, understand the key differences.
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 capped the interest rates banks could offer for traditional deposit accounts like checking and savings. Money Market Accounts share some features with traditional deposit accounts while providing unique enhancements.
Like savings accounts, Money Market Accounts typically allow a limited number of transactions per month. Often, the limit is 6 transactions per statement period. While the number of transactions is limited, 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. However, Money Market Accounts typically offer a higher interest rate than liquid checking accounts due to the limited transaction frequency.
Cash in a Money Market Account is not subject to a set investment period. As such, there are no early withdrawal penalties like with Certificates of Deposit [CDs].
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 investments such as short-term bonds, commercial paper, and repurchase agreements.
These mutual funds typically have similar yields to the prevailing short-term interest rates. That’s because the underlying securities generate income based on the current market interest rates. This income is passed through the mutual fund to the shareholder. When interest rates for short-term debt change, the mutual fund yield also tends to change.
Contrasting Money Market Accounts and Money Market Mutual Funds
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. Money Market Accounts issued by FDIC member banks offer the highest level of safety. Both principal and interest in Money Market Accounts are insured by the FDIC up to the $250k per account ownership category limit at each bank. If the bank fails, the FDIC steps in to make depositors whole. 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 covered by SIPC – a non-profit membership corporation that seeks to return securities to investors if the broker-dealer holding them fails. 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
Money Market Accounts, like other deposit accounts, have a stable value. 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.
On the other hand, Money Market Mutual Funds are securities. Like other mutual funds, the value of a Money Market Mutual Fund can change based on market factors. In the securities world, Money Market Mutual Funds are unique 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.
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.
Conversely, Money Market Mutual Funds do have these 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 0.19% in 2022.1 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, liquid, and interest-bearing investment for cash. They accomplish these goals in different ways and with varying degrees of success. With advancements in financial technology – a.k.a. fintech – a new type of money market investment has evolved which enhances the features of existing options.
AMMA™ from ADM – An Enhanced Money Market Investment
At the American Deposit Management Co. [ADM], we help businesses achieve the safety, liquidity, and returns they need for their cash reserves. Our American Money Market Account [AMMA™] provides access to full FDIC / NCUA coverage – above and beyond the traditional $250k limit – as well as twice-weekly liquidity and nationally competitive returns.
AMMA™ is made possible by proprietary fintech that powers 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. Best of all, our clients get the benefits of multiple banking relationships – including extended FDIC / NCUA protection – with one account and one consolidated monthly statement.
To learn more about AMMA™, contact us today.
1 James Duvall and Casey Rybak, “Trends in the Expenses and Fees of Funds, 2022,” Investment Company Institute (2023), https://www.ici.org/system/files/2023-03/per29-03.pdf.