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Which Type of Money Market Account Is Right for You?

Mutual funds vs. deposit accounts

September 25, 2008

Personal Finance

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Some consumers might have become alarmed in recent days when they heard about a possible run on money market funds. To counter any run, the government has guaranteed these funds for up to one year.

But consumers with money in money market deposits in their local bank never had anything to worry about. Money market mutual funds and money market deposits are two different things, according to the American Bankers Association.

Many consumers are confused about the differences between money market deposit accounts and money market mutual funds (Understanding key differences is imperative so the American Bankers Association put out the following primer.

A money market mutual fund (MMMFs) is a short-term mutual fund that invests in government securities, certificates of deposit, asset-backed commercial paper and other highly liquid securities. Money market funds sell shares to investors and earn interest based on performance. However, if the fund suffers a major loss, the shareholder has no guarantee that the investment will be repaid.

Until earlier this month, these investments carried no insurance. However, the new guaranty program applies only to those money market funds that pay a fee to join it, and would only protect assets invested prior to September 20, 2008 for a period of one year.

A money market deposit account (MMDAs) is an interest-bearing savings account that typically earns more than a regular savings account, but less than a money market fund.

MMDAs are also less risky than MMMFs: they are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 per depositor per insured bank and up to $250,000 for some retirement accounts.

Consumers who are still unsure which type of account they own should consult their statements or their banker.

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December 4 2008

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