Money Market Accounts and Money Market Mutual Funds are interest bearing accounts best suited for short-term parking of extra cash. Money Market Accounts (MMAs) are found at banks and credit unions. These are FDIC insured. Money Market Mutual Funds are usually found at brokerages like Schwab or Fidelity. These do not have the backing of FDIC insurance.
Money Market Accounts and Money Market Mutual Funds have many similarities, however. They both try to stay at a stable price of $1.00. If you put in $1,000.00, you will have $1,000.00 or 1000 shares of the mutual fund. It is very uncommon for these types of money markets to “break the buck” and have a value less than $1.00. This stability gives the owner a sense of safety because it virtually eliminates market risk for your funds held in the account.
Money markets also pay interest. The interest is variable but is usually more than a regular savings or checking account. The interest rate that is paid can change daily, and the bank or brokerage will give you the 7-day yield on your account. This tells you the average rate for the last 7 days you would have received on your money in the account. This standard yield quote helps investors compare money market funds and determine the best place for their extra cash. Interest is usually paid once a month, although it accrues daily.
At a brokerage company, you can choose between several different types of money market mutual funds. They may have a general taxable fund, a government and treasury fund, and also a municipal fund, in which the interest is tax exempt. The funds will invest in very short-term vehicles such as CDs, government securities, commercial paper, etc. and are considered very low risk. The bank money market accounts are a type of deposit account and do not directly invest in these short-term vehicles. The bank will decide the interest rate paid for having your money in these deposit accounts.
Money markets may also have some limits for the account holder. Sometimes the account will have limits on how many withdrawals you can make within a set time period – usually per month. They may or may not have checks and debit cards available to use to withdraw your funds. Also, with money market mutual funds it may take a day to have access to your funds as they must be sold out of the money market mutual fund and then be placed in your regular cash account in order to be available. Some of the money market mutual funds may also have minimum amounts to use their accounts. Those with higher minimums usually will pay a higher interest rate.
If you have extra cash that you are saving for a short-term goal and are leery of the stock market right now, or don’t want to lock it in with a CD or a bond, consider a money market. Check with your local bank or your brokerage and see what is available. As always do your own due diligence before making any investment. Sources include Schwab and Investopedia.com.
(Intentional Investing is a weekly column written by Kyle Smith from Floyd County, TX, based upon his investment knowledge and does not represent the views or opinions of the Floyd County Record)
