Money Market Accounts Vs. Money Market Funds

[james.hendrickson]

Hi Guys,

I am a bit ashamed to confess that I do not know the difference between a Money Market Account vs. A Money Market Fund. Anyone have an idea?

[kork13]

Primary difference:
A MMA is held at/by a bank, and is FDIC insured accordingly. The bank then uses those funds (pooled with funds from other MMA holders) to purchase money market holdings (primarily short term bonds/treasuries).

In contrast, a MMF is held at/by an investment/brokerage company, and funds do not receive FDIC coverage. Again, the brokerage then invests that money in money market holdings.

Both can have their earnings fluctuate somewhat by market conditions, but MMF returns are more subject to this effect. Banks typically will set a relatively consistent, flat rate, and merely adjust it periodically as required, whereas the brokerage MMF earns returns directly based on market conditions month-to-month, without any sort of buffering effect. Both typically have check-writing privileges, are limited to 6 withdrawals per month, and are (on the whole, "Great Recession" effects exempted) very safe vehicles for holding cash.

[Tabs]

I think it's awesome to ask questions.

To add on to what Kork said, Money Market Funds are true mutual funds created by investment companies... I believe to compete with bank saving accounts (trying to re-call all this off the top of my head here).

They are designed to preserve capital (not break the buck) and can be sold very quickly by usually holding international currencies and perhaps short term bond as well. Fust for fun, I went ahead and looked up the holdings listing for Vanguard's Prime Money Market Fund. So it looks like US Treasuries are the main instruments being used here, with international currencies sprinkled in.

It's true that MMFs do not enjoy the government's FDIC protection, but rarely have MMFs broken the buck to begin with. That and they should also have SIPC coverage.

As for Money Market Accounts, as far as I know, they are just bank saving accounts, but usually with higher limits. Legally though, they still work the same way as savings accounts (including how many times you can withdraw from it per month), whereas there are no legal withdraw limits on MMFs (since they are often times handled just like cash).

I think the only reason they are called Money Market Accounts is because the banks wanted to create a marketing instrument to fight back against MMFs. Don't hold me to that though, since again, I am trying to recall all this off the top of my head. But really a bank can label any generic savings accounts to any name they think is marketable. I remember a bank I was once with had a "Fat Cat Savings account" marketed towards children. In other words, I think it might be easier to simply think of MMAs as just another form of marketed Saving Accounts.

[james.hendrickson]

Guys - thanks much.

[JBinKC]

I think what has not been mentioned is many MMFs returns are currently being totally eaten up by management fees which is the big problem of holding cash in a brokerage account.