How a Money Market Fund and Money Market Account Differ

A number of people looking for safe places to park their money confuse a money market fund with a money market account. Even though the names sound the same, they actually operate differently from one another.

Banks created money market accounts in order to compete directly with money market funds in order to keep the money in the bank, rather than a competitor's coffers.

Normally how a money market account works, is it's essentially the same as a bank savings account, but usually offers higher interest rates, along with higher balance requirements, than a regular savings account. Normal savings account won't usually have any minimum requirements.

Another value to those looking for safe places to part their money, is the cash placed in the money market fund of a bank is also backed up by the Federal Deposit Insurance Corporation (FDIC). Now that protection stands at $250,000, but unless changed, will revert back to the usual $100,000 when that ends.

Banks aren't the only financial institutions offering money market accounts, as credit unions also offer the savings vehicle. In the case of credit unions, they also provide protection for your money, although they do it via the National Credit Union Administration, which is also a government entity.

The difference between a money market fund and money market account, is a money market fund is a mutual fund which invests capital in short-term securities like CDs, commercial paper and U.S. Treasuries, or other short-term investment vehicles.

While a money market fund is usually very safe and won't lose any of your capital, it occasionally does break-the-buck, which means it can fall below the value of your investment. This has happened recently during the economic crisis with some money market funds. The collapse of Lehman Brothers brought this about, where investors lost their capital. While rare, as you can see, there can be some risk.

As always, the slightly increased risk will include better returns as well, so all that needs to be considered when making your investment decisions.

Depending on your risk tolerance, either one of these would be a good place to put your savings, especially money you can access immediately if need be.

Again, the difference is guaranteed safety of your capital in a money market account, while you have slightly more risk with a money market fund, although you should receive a slightly higher return on your money as well.

There's no reason to put your safe money in a money market fund unless it offers a better return.