Are money markets safer than bank deposits?
You could lose money by investing in a money market fund. An investment in the Fund is not a deposit of the bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds are not subject to credit risk, but will have interest rate risk.
Other assets like bonds provide relatively lower risk compared to less conservative assets such as options, stocks, or alternative assets. Money market accounts (MMAs) and similar investments that pay a higher return than a traditional savings account also offer lower risk.
Because all deposits are insured from bank failure, it is uncommon to lose money in a money market.
How safe are money market funds? There is little risk associated with money market funds. The U.S. Securities and Exchange Commission (SEC) mandates that only the highest-credit-rated securities are available in money market funds.
- Limited transactions. Some accounts limit certain transfers and withdrawals (known as convenient transactions) to six per month, so this isn't the best account for regular banking. ...
- Deposit and balance requirements. ...
- Fees. ...
- High interest rates. ...
- Flexible access. ...
- Federal insurance.
| Account | National average money market account | Sallie Mae Money Market |
|---|---|---|
| Deposit amount | $10,000 | $10,000 |
| APY | 0.68% APY | 4.65% APY |
| Earnings after six months | $33.94 | $229.86 |
| Earnings after 1 year | $68 | $465 |
Money market funds are usually considered to be safe investments, but it's important to remember that these investments are intended for the short term. With maturities of 13 months or less, the funds stay liquid and allow you better access to your money than longer-term investments.
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.
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.
Are money markets 100% safe?
Low Risk and Short Duration
As stated above, money market funds are often considered less risky than their stock and bond counterparts. That's because these types of funds typically invest in low-risk vehicles such as certificates of deposit (CDs), Treasury bills (T-Bills), and short-term commercial paper.
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
Money market funds invest in short-term debt securities. As a result, money market funds can be a good option for investors looking for a low-risk investment that offers relatively easy access to their money.
Money market accounts offer flexibility with check-writing and debit cards, savings accounts are more accessible and have lower fees, and CDs offer higher interest rates but with a commitment to keep your money locked away for a set period of time.
Some money market accounts come with minimum account balances to be able to earn the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.
Taxable money market funds, also known as prime money market funds, usually offer higher yields than tax-exempt funds, but any income is subject to taxes. Prime funds invest in corporate and bank debt issued by U.S. and international entities.
As of May 2024, no banks are offering 7% interest rates on savings accounts. Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
| How Much Do Americans Have in Their Savings Accounts? | ||
|---|---|---|
| $501-$1,000 | 11.30% | 12.58% |
| $1,001-$2,000 | 10.60% | 9.81% |
| $2,001-$5,000 | 10.60% | 10.64% |
| $5,001-$10,000 | 9.20% | 9.51% |
Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners.
- Your Money Could Earn More Elsewhere. High-risk investments could provide better returns in the long run. ...
- Your Funds Are Uninsured. If you open a CD or a checking, savings or money market account from a bank, your funds are FDIC-insured. ...
- You Can Expect Fees.
What is the safest type of money market fund?
| Money market fund | Expense ratio | 7-day SEC yield |
|---|---|---|
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 0.11% | 5.3% |
| Fidelity Money Market Fund (SPRXX) | 0.42% | 5% |
| North Capital Treasury Money Market Fund (NCGXX) | 0% | 5.4% |
| Schwab Municipal Money Fund - Investor Shares (SWTXX) | 0.34% | 3.3% |
The biggest risk a money market account poses is that your money may lose value over time to inflation. Depending on inflation and the interest rate you earn with your money market account, inflation may outpace your MMA's earnings.
First and foremost, money market accounts are typically safe because they're insured by the federal government. If you open a money market account at a federally insured bank, the Federal Deposit Insurance Corp. (FDIC) insures up to $250,000 of your cash per bank, per depositor.
Key takeaways
Money market accounts are a type of deposit account that earns interest. Rates are often higher than traditional savings accounts. Money market accounts typically limit your withdrawals per month and have a higher minimum balance requirement than traditional savings accounts.
On Sept. 16, 2008, the Reserve Primary Fund broke the buck when its net asset value (NAV) fell below $1 per share. It was one of the first times in the history of investing that a retail money market fund had failed to maintain a $1 per share NAV. The implications sent shockwaves through the industry.
