Money market accounts are perfectly safe. Banks offer these accounts to consumers interested in earning slightly higher interest on their deposits than they would receive with standard checking and savings accounts. Consumers sometimes confuse money market accounts with money market funds. Both are relatively low-risk savings vehicles.
Money Market Accounts
Consumers who want money market accounts can open them at banks that offer them. These accounts offer higher interest rates and provide account holders with limited check writing ability. Banks also place restrictions on the number of withdrawals account holders can make from their money market accounts, if the account holders wish to avoid fees.
Consumers need not worry about the safety of money market accounts, as these accounts are insured by the FDIC up to the maximum amount allowed by law. Also, banks invest the money from their customers’ accounts into low-risk vehicles such as certificates of deposit (CDs) and government securities.
Money Market Funds
Consumers can buy into money market funds, which are similar to mutual funds. These investment products can be purchased from brokerage firms and banks. Buying into a money market fund allows the consumer to make gains on a diversified portfolio that includes relatively safe investments such as U.S. Treasury bills and CDs. Higher-risk money market funds may invest in commercial paper, which is corporate debt, or foreign currency CDs. Money market funds can lose value depending on market conditions such as interest-rate drops.
Money market fund investors are not insured against loss, but they are covered by the U.S. Treasury if the brokerage firm they are working with fails. Unlike money market accounts, money market funds are not insured by the FDIC.