What is a Money Market Fund and is it safe?

With the recent failures of regional banks across the country, many are wondering if their deposits in savings accounts, CDs, and other bank accounts are safe. Money Market Funds are one alternative to banks, though not the only one. In this post I’ll highlight areas where savers can park cash, including Money Market Funds, and outline the highlights of each.

Bank accounts

• Most common accounts include checking, savings, and CDs

• Offered at banks with branches for conducting transaction and building relationships between bankers and clients

• Accounts typically have FDIC insurance up to $250,000 ($500,000 joint account)

• Offer very low interest rates

High Yield savings and Money Market accounts

• Often offered by online banks with no branches

• Accounts typically have FDIC insurance up to $250,000 ($500,000 joint account)

• Offer much higher interest rates than traditional banks

• Note: Money Market Accounts are a type of interest-earning savings account. Money market accounts are offered by banks and credit unions and should not be confused with Money Market Funds (below) which are offered through mutual fund companies.

Money Market Funds

• Offered by mutual fund companies

• A fund invested in diversified set of short-term debt instruments including banker’s acceptances and CDs (banks), commercial paper (corporations), repurchase agreements and US treasury securities (government)

• Provides diversified exposure to spread risk

• Not FDIC insured, but considered very safe

US Treasury Bills

• A short-term bond (days, weeks, or up to a year) offered for sale by the US government

• Higher interest rates than bank deposits

• Not FDIC insured but backed by the federal government which has never defaulted on its debt

• Interest exempt from state and local taxes

• Not as liquid as bank deposits

As indicated above there are multiple places to park cash and earn interest, each with their own pros and cons. The original question about Money Market Funds is a good one. These funds invest in a variety of instruments, therefore spreading risk in case one party (bank, corporation, or government) falters. However, they are not FDIC insured.

I recommend keeping enough cash in a checking account pay bills, and spreading existing cash across a high yield savings account and Money Market Fund. This will limit risk and amplify the interest earned on the accounts. Treasuries are a little more difficult to buy and sell so I would only use them for money you don’t need to access immediately.