Is it worth to invest in money market funds?
The Bottom Line
Money market funds can be a good fit for investors looking to benefit from the current interest rate environment or saving for a short-term goal. Keep in mind that while the funds are considered low risk, they are not FDIC-insured.
Many accounts have monthly fees
Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.
Typically, a brick-and-mortar (or traditional) bank's money market account has higher monthly service fees but offers a better interest rate compared to its savings account. But online savings and MMA accounts don't always follow that pattern — they both tend to have competitive rates and low or no monthly fees.
Money Market Funds
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.
Key takeaways
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.
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.
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.
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.
What is better than a money market fund?
Alternatives to money market funds, money market accounts, and savings accounts include: Certificates of deposit: CDs are term-based savings accounts that lock up your funds for a set time period in exchange for higher interest rates.
If the saver is able to meet the minimum balance, doesn't anticipate needing the funds anytime soon, and is interested in a higher interest rate, a money market account is the better choice.
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.
Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure. You can, however, be subject to fees and penalties that reduce your earnings.
How much should a money market investor be concerned with that risk? 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.
Treasury Bonds
Investors often gravitate toward Treasurys as a safe haven during recessions, as these are considered risk-free instruments.
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.
It's technically possible to lose money in a market account, but not in the same way you can lose money in an investment account. Depending on the terms of your money market account, you could lose value to fees and inflation.
U.S. government money market funds are typically regarded as the safest of the three, and within that category, those with a high concentration of Treasuries—with full government backing—would be exposed to a lower likelihood of default risk.
Investing $1,000 a month for 20 years would leave you with around $687,306. The specific amount you end up with depends on your returns -- the S&P 500 has averaged 10% returns over the last 50 years. The more you invest (and the earlier), the more you can take advantage of compound growth.
Where is the best and safest place to invest your money?
Investment Type | Safety | Liquidity |
---|---|---|
Treasury bills, notes and bonds | High | High |
Money market mutual funds | High | High |
Treasury Inflation-Protected Securities (TIPS) | High | High |
High-yield savings accounts | High | High |
Money market funds should be used as a place to park money temporarily before investing elsewhere or making an anticipated cash outlay; they are not suitable as long-term investments.
Top Nationwide Rate (APY) | Balance at Maturity | |
---|---|---|
6 months | 5.76% | $ 10,288 |
1 year | 6.18% | $ 10,618 |
18 months | 5.80% | $ 10,887 |
2 year | 5.60% | $ 11,151 |
If you're saving for a medium- or long-term goal, want to earn a fixed interest rate and want the assurance that your money is safe, a CD can be a good investment. If you need access to your money, a money market account would be more fitting as it offers greater liquidity.
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.
References
- https://fortune.com/recommends/banking/what-are-money-market-funds/
- https://www.fool.com/the-ascent/banks/where-put-money-recession/
- https://www.cusocal.org/Learn/Financial-Guidance/Blog/Can-money-market-accounts-lose-money
- https://www.forbes.com/advisor/investing/best-safe-investments/
- https://www.investopedia.com/pros-and-cons-of-cds-5223947
- https://smartasset.com/financial-advisor/where-do-millionaires-keep-their-money
- https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/tried-true-money-markets-get-boost.html
- https://www.sofi.com/learn/content/can-a-certificate-of-deposit-cd-lose-value/
- https://www.businessinsider.com/personal-finance/is-money-safe-in-bank-during-recession
- https://www.schwab.com/money-market-funds
- https://www.cnn.com/cnn-underscored/money/can-you-lose-money-in-a-money-market-account
- https://time.com/personal-finance/article/money-market-vs-savings-account/
- https://www.nerdwallet.com/article/banking/money-market-account-vs-savings-account-which-should-you-choose
- https://www.forbes.com/advisor/banking/money-market-account/are-money-market-accounts-safe/
- https://www.bankrate.com/banking/mma/money-market-account-advantages-and-disadvantages/
- https://www.nolo.com/legal-encyclopedia/financial-institution-fails-acquired-29945.html
- https://www.quora.com/Is-it-safer-to-put-money-in-a-bank-CD-compared-to-buying-US-Treasury-bills-now-since-the-US-government-could-default-if-the-debt-ceiling-is-not-raised
- https://finance.yahoo.com/personal-finance/can-you-lose-money-in-money-market-account-182341738.html
- https://www.investopedia.com/ask/answers/053016/how-safe-are-money-market-accounts.asp
- https://www.cnn.com/cnn-underscored/money/are-money-market-accounts-safe
- https://money.usnews.com/investing/articles/best-investments-during-a-recession
- https://www.investopedia.com/what-happens-to-your-cd-if-your-bank-fails-7511009
- https://www.etftrends.com/monthly-income-channel/money-market-funds-great-until-tax-time/
- https://www.bankrate.com/investing/what-is-a-money-market-fund/
- https://www.investopedia.com/articles/mutualfund/08/money-market.asp
- https://www.investopedia.com/terms/m/money-marketfund.asp
- https://www.fool.com/the-ascent/buying-stocks/articles/heres-how-much-money-you-could-have-if-you-invested-1000-a-month-for-20-years/
- https://www.bankrate.com/banking/savings/money-market-vs-savings-accounts-vs-cds/
- https://www.citizensbank.com/learning/money-market-account-vs-cd.aspx
- https://www.forbes.com/advisor/banking/money-market-account/can-you-lose-money-in-mma/
- https://www.forbes.com/advisor/banking/pros-and-cons-of-using-a-certificate-of-deposit-cd-for-your-savings/
- https://www.schwab.com/learn/story/what-are-money-market-funds-and-how-do-they-work
- https://www.usatoday.com/money/blueprint/investing/what-assets-are-recession-proof/
- https://www.fidelity.com/learning-center/smart-money/money-market-vs-CD
- https://www.investopedia.com/articles/mutualfund/08/money-market-break-buck.asp
- https://www.experian.com/blogs/ask-experian/dos-and-donts-of-saving-during-recession/
- https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp
- https://www.bankrate.com/investing/best-money-market-funds/
- https://www.investopedia.com/what-can-i-earn-with-10k-in-a-cd-8400034
- https://www.investopedia.com/articles/personal-finance/111516/5-mistakes-youre-making-money-market-accounts.asp
- https://www.investopedia.com/articles/mutualfund/08/recession-proof-mutual-funds.asp
- https://www.experian.com/blogs/ask-experian/pros-cons-money-market-funds/
- https://www.forbes.com/advisor/banking/money-market-account/money-market-account-vs-savings-account/
- https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/mutual-funds/us-government-debt-ceiling-and-fidelity-money-market-funds.pdf
- https://www.experian.com/blogs/ask-experian/can-you-lose-money-in-money-market-account/
- https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp
- https://fortune.com/recommends/banking/pros-and-cons-of-money-market-accounts/
- https://www.cnn.com/cnn-underscored/money/pros-and-cons-of-money-market-accounts
- https://www.bankrate.com/banking/money-market-vs-cd/
- https://www.troweprice.com/personal-investing/resources/insights/4-reasons-to-save-in-a-money-market-fund.html
- https://am.jpmorgan.com/us/en/asset-management/liq/resources/investment-academy/evaluating-risk/Money-market-fund-risks/