Whether you’re reading a book or speaking with a broker, understanding financial terms is a lot like learning a new language. At some point, everything starts to sound alike. Here, we cover two different financial products. Although they have similar names, they work quite differently.
What is a Money Market Account (MMA)?
The banking product that can be most accurately compared to an MMA is a high-yield savings account. Both pay interest on your deposit. Neither has any risk because it’s either NCUA- or FDIC-insured for up to $250,000 per account holder, per account.
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When you deposit money into an MMA, the more you deposit, the higher the interest rate you’ll earn. There may also be a minimum balance to adhere to.
Although money deposited into an MMA earns relatively little interest, it is safe, and you have access to the funds whenever you need them.
MMAs are good for stowing short-term savings. If you want to keep it liquid but also want to earn a little interest, consider putting your money into a money market account.
What is a Money Market Mutual Fund (MMMF)?
Think of an MMMF as your most stable friend, the one who looks both ways before crossing the street and almost always makes good decisions. They may not be the most colorful or dramatic of your friends, but they are steady.
As an investment, an MMMF is a lot like that friend. Its sole goal is to be dependable and provide safe returns. There are all types of MMMFs, and each MMMF holds its own types of investments. What all those accounts have in common is that they attempt to avoid huge risks and provide you with a stable asset.
When compared to other investments, MMMFs are inexpensive. However, due to fluctuations in the market, an MMMF is not where you want to keep an emergency fund. After all, once you’ve gone to the trouble to build an emergency savings account, you don’t want to risk it.
Rather, an MMMF is an appropriate add-on to an established portfolio. If other investments in your portfolio are risky, an MMMF can provide a nice balance.
Here are some easy takeaways to help you remember the difference between a money market account and a money market mutual fund:
- While an MMA is a deposit, an MMMF is an investment.
- Because it’s considered a bank deposit, MMAs are insured for up to $250,000 per depositor per account.
- As an investment, MMMFs enjoy no protection or insurance. It’s possible that your investment will perform well, and it’s possible that you’ll lose a large portion of your capital.
- While MMAs generally have no fees, investing in an MMMF does carry fees.
Neither of these banking products is better than the other. Instead, they are complementary, each designed to enhance your financial security
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