Money Market Accounts vs. Money Market Funds: What's the Difference?

Money market accounts and money market funds have nearly identical names, and both offer a place for cash to earn interest. But they are fundamentally different products, offered by different kinds of institutions, with different levels of protection. Knowing the difference helps you choose the right home for your savings.

What is a money market account?

A money market account, often abbreviated MMA, is a type of deposit account offered by banks and credit unions. It sits somewhere between a savings account and a checking account. Like a savings account, it pays interest, often at a higher rate than a basic savings account. Like a checking account, it may come with checks or a debit card, making it easier to access your money.

Because an MMA is a deposit account, it is protected by federal deposit insurance when it is held at an FDIC-insured bank or an NCUA-insured credit union. That coverage is generally up to $250,000 per depositor, per insured institution, for each account ownership category. If the bank fails, insured deposits are protected.

Some money market accounts require a minimum balance to open, to avoid monthly fees or to earn the advertised rate. Others may limit how many withdrawals or transfers you can make each month. Always read the account terms before opening one.

What is a money market fund?

A money market fund is something else entirely. It is a type of mutual fund, offered by brokerage and investment firms, that invests in short-term, high-quality debt, such as U.S. Treasury bills, certificates of deposit and commercial paper issued by large companies.

Money market funds aim to maintain a stable value, typically $1 per share, while paying out income from their investments. Because they are investments rather than deposits, they are not covered by FDIC or NCUA insurance. They can lose money, although that has been rare historically. Money market funds are regulated by the Securities and Exchange Commission, which sets rules about the quality, maturity and diversification of their holdings.

There are different types of money market funds. Government money market funds invest almost entirely in government securities. Prime funds may include corporate debt. Tax-exempt funds invest in municipal debt, which can produce income that is exempt from federal income tax.

Comparing the two

The biggest difference is insurance. A money market account at an insured institution is protected up to legal limits. A money market fund is not insured, though it may carry account protection through brokerage-level coverage that applies in different circumstances, such as a brokerage firm failing, rather than investment losses.

Where you get them is different, too. Money market accounts come from banks and credit unions. Money market funds come from brokerage firms and fund companies, and they are often held inside an investment account.

Both tend to track short-term interest rates. When the Federal Reserve raises or lowers its benchmark rate, yields on both products usually follow, so neither locks in a rate the way a certificate of deposit does.

Access works differently as well. Money market accounts may allow checks, debit cards and transfers to your checking account. Money market funds are typically bought and sold within a brokerage account, and moving money to your bank may take a business day or two.

When a money market account makes sense

For an emergency fund or short-term savings goal, a money market account or high-yield savings account at an insured bank is a common choice. You get federal protection, easy access and a competitive rate. If you like being able to write the occasional check from your savings, an MMA can be especially convenient.

Compare rates, minimum balance requirements and fees across institutions. Online banks often offer higher rates than traditional branch-based banks because they have lower overhead.

When a money market fund makes sense

Money market funds are often used to hold cash inside an investment account. If you sell investments, receive dividends or are waiting to invest new contributions, a money market fund gives that cash a place to earn income in the meantime. Many brokerages use a money market fund or bank sweep program as the default cash holding.

Some investors also use money market funds for larger cash reserves because their yields are often competitive. If you go this route, understand that you are accepting a small degree of risk in exchange for that yield.

The bottom line

Both products can be useful parts of a financial plan. Think of a money market account as a savings tool with deposit insurance, and a money market fund as a low-risk investment tool. Choosing between them comes down to what the money is for, how quickly you might need it, and how important federal deposit insurance is to you.

This article is for education only and isn’t investment advice.