What Are Money Market Mutual Funds?

What we’ll cover:

• A money market mutual fund (or simply “money market fund”) is a type of fund that typically invests in high quality, short-term debt instruments, including CDs and US Treasury notes
• Money market mutual funds are generally considered to be less susceptible to market volatility than other types of investment options such as stocks
• Money market mutual funds are not insured by the FDIC

A money market mutual fund (or simply, “money market fund”) is a type of fixed income mutual fund that typically invests in debt instruments like certificates of deposit (CDs), U.S. Treasury notes, municipal bonds and corporate commercial papers that are of high credit quality (translation: low risk of default) with short maturity dates. 

A quick word of caution: Do not confuse money market mutual funds with money market accounts. Due to their similarity in name, people often confuse the two. 

Money market accounts are a type of deposit savings account, where the deposits are generally insured by the FDIC. 

On the other hand, a money market mutual fund is a type of investment product that is not insured by the FDIC. 

Why invest in money market mutual funds?

Due to the type of investments they hold, money market mutual funds are generally considered to be less susceptible to market volatility than other types of investment options such as stocks.

Investors look to money market mutual funds when they want to park their money in an investment vehicle that’s relatively stable and where they’re able to generally earn higher interest rates than a traditional savings account. You might look to invest in these funds if your primary goal is to preserve principal (the amount you originally invested) while earning a modest return on investment.

Money market mutual funds are considered liquid assets, meaning you can quickly convert your investments into cash when necessary. For instance, many money market funds provide check-writing privileges.

In addition to their general stability and liquidity, money market funds are also popular because of their built-in diversification and potential tax benefits.

Where can you buy money market mutual funds?

You can invest in money market mutual funds through a brokerage firm or other authorized providers. 

If you choose to go through a brokerage firm, you’ll need to open a brokerage account. The minimum age requirement to open an account varies state to state. Depending on where you live, you have to be at least 18 or 21 years of age. 

Although the minimum initial amount needed to invest typically ranges from $500 to $5,000, some brokerage firms offer funds with a $0 minimum. But pay attention to any management and operating fees associated with a particular fund, as they could put a dent in your overall earnings.

How are money market mutual funds different from high-yield savings accounts?

The two products might seem similar in certain ways, but there are differences. 

One important area of distinction is FDIC insurance. When you open a high-yield savings account at an FDIC member bank, your deposits are insured by the federal government. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

On the other hand, money market mutual funds are a type of non-deposit investment product. The money you invest in these funds is not insured by the FDIC.

Although some brokerage firms that offer money market mutual funds are insured through the Securities Investor Protection Corporation (SIPC), SIPC insurance doesn’t protect against any losses in the value of your investments. SIPC simply protects your assets if your brokerage firm goes bankrupt. Each customer is insured up to $500,000 (this total coverage includes up to $250,000 in protection for cash in your account).

So from that perspective, high-yield savings accounts are generally considered safer than money market mutual funds.

Think about it this way: Your principal and your interest earnings in a high-yield savings account are fully insured by the FDIC up to its limit. But with a money market mutual fund, your principal and earnings are subject to potential losses if there are adverse market changes – SIPC does not protect you from these declines in your account value. 

Investing in money market mutual funds also comes with another consideration. Even though they typically deliver 1% to 3% in returns, these rates are not guaranteed. Just because a particular fund has performed well in the past, that doesn’t mean it can deliver similar returns in the future. 

To help highlight their differences, let’s compare money market mutual funds with a Marcus Online Savings Account.