What is the problem with money market funds?
Interest rate risk
They may come with the ability to pay bills, write checks and make debit card purchases. Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
While money market funds aren't ideal for long-term investing due to their low returns and lack of capital appreciation, they offer a stable, secure investment option for individuals looking to invest for the short term.
"The risk associated with money funds is very low, given that the SEC mandates that only securities with high credit quality and shorter maturities are eligible holdings," Smith says. "For investors, it's like you're getting paid to be patient while the Federal Reserve works toward taming inflation."
If the security accounts for 0.5 percent or more of the fund's portfolio, the fund also must report the default to the SEC. In addition, the US government's failure to pay its obligations could trigger a severe downgrade of its short-term credit rating by NRSROs.
Money market funds are likely to keep growing if the Fed holds rates at their current level, or raises them further. I've used money market funds on and off for decades with no problems, and consider them to be fairly — though not entirely — safe.
A money market fund might have once offered the highest return for your buck. But insured money market and savings accounts may offer competitive rates without the management fees, and with federal insurance for up to $250,000. So, be sure to compare the terms and rates with each.
However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.
Money market funds can protect your assets during a recession, but only as a temporary fix and not for long-term growth. In times of economic uncertainty, money market funds offer liquidity for cash reserves that can help you build your portfolio.
In the realm of mutual-fund-like investments, money market funds are characterized as low-risk, low-return investments. Many investors prefer to park substantial amounts of cash in such funds for the short term. However, money market funds are not suitable for long term investment goals, like retirement planning.
What is the safest type of money market fund?
Vanguard Treasury Money Market Fund
This fund only invests in US Treasuries and repurchase agreements insured by the federal government, making it among the safest in a category of relatively safe investments. The weighted average maturity of the fund's holdings is 43 days.
There's no risk of you losing your deposit with a money market account. While money market accounts are considered low-risk accounts, that doesn't mean there aren't small risks to be aware of. The biggest risk a money market account poses is that your money may lose value over time to inflation.
Money market accounts and savings accounts are equally safe places for consumers to keep their savings. However, it's important to open accounts at banks that are covered by FDIC insurance. You can check if your bank is FDIC-insured here.
Smith: Since their introduction in 1971, money market funds have broken the buck just two times. The first was in 1994, when a fund was liquidated at 96 cents per share because of large losses in derivatives.
Can I lose money when I invest in money market funds? Yes. Although money market funds seek to maintain a stable $1 share price, capital preservation is not guaranteed.
Thinking about it doesn't mean panicking. Even in a crisis, I buy and hold diversified investments in the global stock and bond markets, preferably through low-cost index funds. That's a well-tested approach for long-term investing.
The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't.
For the most part, money markets provide those with funds—banks, money managers, and retail investors—a means for safe, liquid, short-term investments, and they offer borrowers—banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds.
Income earned from money market fund interest is taxed as regular income, up to 37% depending on the investor's tax bracket. While some local and state taxes offer breaks on income earned from U.S. Treasury bonds, federal income tax still applies.
A money market fund is a type of investment account that invests in funds that may gain and lose value, meaning you could lose part of your initial investment.
Is CD safer than money market?
Both CDs and MMAs are federally insured savings accounts, so they're equally safe.
Insurance. Since money market funds are investment products, they're not insured against loss by the FDIC or NCUA. Your investment could lose money.
(2) Maintaining an emergency reserve. Having money outside of retirement accounts can act as a personal safety net to get through financial hurdles, such as a period of unemployment or an unbudgeted large expense. We recommend an amount that could cover three to six months of expenses.
On the other hand, money market accounts usually limit the number of transactions you can make by check, debit card, or electronic transfer. Usually you can make unlimited withdrawals and payments by using an ATM or by making the withdrawal in person, by mail, or by telephone.
Your assets are protected at Schwab. We work hard to make Schwab a secure and safe place for your money. Whether you hold securities like stocks, bonds, mutual funds, exchange traded funds, or money market funds in a Schwab brokerage account, or cash deposits in a Schwab Bank account, we have your assets protected.
