Money Market Accounts
A money market account is a savings account much like any savings account available through a bank. Money market accounts are also offered by credit unions. These accounts are sometimes called money market demand accounts or money market deposit accounts.
This account is different from other savings accounts in that the interest rate is usually higher and the minimum deposit is usually $1,000 or more. Banks and credit unions also normally allow checks to be written against these accounts. Withdrawals can also be made, although usually withdrawals are limited to three or four per month. A debit card may also be provided for withdrawals from an account.
Money market accounts at banks are insured by the Federal Deposit Insurance Corporation (FDIC) like any other bank account so that funds will not be lost in the event that the bank fails. At a credit union, money market deposits are insured by the National Credit Union Administration (NCUA), a similar federal agency.
Deposit institutions often offer a money market mutual fund along with a money market deposit account. An important distinction between them is in the form of investment used in management of the funds. Funds in money market accounts are invested in low risk government and commercial investments like United States Treasury Bonds, Treasury Bills, savings bonds, and certificates of deposit. The rate of return typically earned from these investments is low, but the risk is negligible or even nil. The money market mutual fund, on the other hand, while still designed to minimize risk, utilizes investments that do have a slightly higher risk, and thus are expected to pay a higher return.
Money market mutual funds are still invested in debt instruments, but normally these are commercial debt instruments, such as notes owed by private companies, rather than government debt instruments. The money market mutual fund is closer to a stock mutual fund in the method of investment used; even though the risk is always much lower than that of a stock mutual fund. A more important difference between the two is that the money market mutual fund is not a bank or credit union account and is not guaranteed by the FDIC or NCUA. Also, these mutual funds incur expenses that are passed on to investors and their value is subject to greater fluctuation than the value of a money market account, which generally does not fluctuate.
Money market accounts are competitively sold by banks and credit unions. Return rates vary from institution to institution. At the same time, there are also fees charged to holders of these accounts, and fees will vary, too. Often, a higher return rate is associated with higher fees. There are a number of groups and agencies that track and report on money market account performance. Funds are rated according to earnings and fees. Potential investors may wish to review some of these reports, and they are available on the Internet as well as in publications released by major banks and investment companies.