Are Money Market Accounts Safe?

If anyone had asked you this question a few years ago you probably would have been told that money market funds are among the safest investment products you could find. However, during the subprime mortgage crisis beginning in 2008, many mutual funds saw significant losses as their portfolios were heavily invested in that segment of the market. There began some amount of confusion in regards to money market funds, mutual funds and money market deposit accounts. Somehow the three were seen as the same thing by many new investors and they were concerned whether or not investing in money market funds would be safe. Before answering that question, it is important to understand the difference between those three vastly different investment products.

Many Financial Institutions Compounding the Confusion
Much of the confusion stems from the fact that many financial institutions are offering investment products called ‘money market deposit accounts’ that are FDIC insured. These accounts are set up with a minimum amount required on deposit at all times and ‘investors’ are provided a certain amount of checks to make a prespecified number of withdrawals within a given length of time. Make no mistake. These are not money market funds. They are a type of savings account that enables the financial institution to make loans based on monies they hold at any given time. This in itself is misleading because of the terminology used. Yes, they do yield higher interest than conventional savings accounts and yes, they are FDIC insured, but no they are not money market funds.

Money Market Funds vs. Mutual Funds
Now then, here is another area that causes some amount of confusion. Mutual funds are a type of professionally managed collective investment scheme that buys securities and other short term money market instruments with pooled money from a great many investors. The managed investments are based on the objective of the managed fund. For this reason they could be a bit risky, and indeed have proven to be so as evidenced by the recent subprime mortgage meltdown. Money market funds, on the other hand, by their very definition are not as risky and much safer investment products. The U.S. Securities and Exchange Commission (SEC) defines money market funds as a ‘type of mutual fund’ that, by law, is required to only invest in securities that are low-risk. They traditionally invest in certificates of deposit, government securities and other low-risk, but highly liquid securities.

Ascertaining the Safety of Money Market Funds
The SEC further suggests that investors fully investigate all of the available information on any given money market fund prior to making an investment. All money market funds are regulated by laws governing the Securities market and as a result, are probably still among the safest investment products on the market. Even so, before making an investment, get to know the fund by reading the profile or prospectus if there is one available. Also, take the time to read one or two of the most recent shareholder reports. If you have any questions regarding the money market fund you are interested in, you can also browse the web to see if there are any investors who have posted regarding their experiences with the fund. You would be surprised at the wealth of information that is available!

If you understand the difference between mutual funds, money market funds and money market accounts of deposit you should be able to see that money market funds are safer than mutual funds, but may not be as safe as money market accounts. However, money market funds are known to provide higher yields than money market deposit accounts so the tiny bit of added risk is most likely to your advantage financially. Are money market funds safe? By their very definition they are supposed to be!

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