Is your money market fund safer than a money market account?

Despite the similar names, money market funds and money market accounts are fundamentally different products. They’re governed by different regulators, held at different types of institutions, and backed by different protections.

The confusion, though, is understandable, because there are also similarities. Both are used for short-term cash, aim to preserve capital, and typically offer competitive yields. 

But the underlying structure, and what happens when something goes wrong? That’s where they diverge.

Here’s a quick breakdown of their key differences: 

A money market account is a type of deposit account offered by banks and credit unions. It works similarly to a savings account, but may offer a higher interest rate, limited check-writing privileges, or debit card access.

In money market accounts, your deposits are insured by the FDIC at banks or the NCUA at credit unions. This provides up to $250,000 of protection per depositor, per institution against the failure of that institution.

The key point is that your principal is protected, within the insurance limit. Even if the bank fails, the FDIC steps in to cover your deposits, which makes money market accounts generally one of the safest places to hold cash.

A money market fund is a type of mutual fund that invests in short-term, high-quality debt securities such as Treasury bills, government agency debt, commercial paper, and repurchase agreements. Money market funds are offered by brokerage firms, mutual fund companies, and some banks' investment arms.

Money market funds aim to maintain a stable net asset value (NAV) of $1.00 per share, and most of the time they succeed. But because they are investments, not deposits, MMFs are not FDIC-insured and the $1.00 share price is not guaranteed. 

The SEC regulates money market funds under Rule 2a-7 of the Investment Company Act, which imposes strict requirements on credit quality, maturity, and liquidity, but regulation isn’t the same as insurance.

There are three main types of money market funds:

• Government money market funds invest primarily in U.S. government securities and repurchase agreements backed by government collateral. These are considered the safest type of MMF and can maintain a stable $1.00 NAV.

• Prime money market funds invest in a broader range of short-term debt, including corporate commercial paper. Institutional prime funds are required to use a floating NAV (since 2016 SEC reforms), meaning the share price can fluctuate slightly.

• Tax-exempt money market funds invest in short-term municipal securities. Interest is generally exempt from federal income tax but the funds carry similar structural risks to prime funds.

This is a critical distinction between the two products, and it's worth understanding clearly.

How federal insurance safeguards bank deposits

Money market account safety comes down to one thing: federal deposit insurance. 

When you deposit money in an FDIC-insured money market account at a bank, your funds are protected up to $250,000 per depositor, per institution, per ownership category. If the bank fails, the FDIC covers your deposits. Since the FDIC was established in 1933, no depositor has lost a single cent of insured funds.

This protection applies regardless of what the bank does with your money after you deposit it. Even during the 2008 financial crisis, when hundreds of banks failed, every insured depositor was made whole.

Why money market funds lack federal deposit insurance

Money market funds are investment products, not bank deposits. This means they are not covered by the FDIC, NCUA, or any other federal deposit insurance program. 

While brokerage accounts are typically covered by SIPC (Securities Investor Protection Corporation) up to $500,000, SIPC protects against broker-dealer failure, not investment losses. If a money market fund's NAV drops below $1.00, SIPC does not cover the difference.

The practical implication is that the safety of a money market fund depends on the quality of its underlying holdings and the stability of the broader financial markets, and not on a government guarantee.

Money market fund risks are low by design, and for the vast majority of their history, these funds have delivered on their promise of capital preservation. But low risk is not the same as no risk, and the specific risks they carry are worth understanding.

NAV fluctuation ("breaking the buck")

The defining risk of a money market fund is the possibility that its share price falls below $1.00. This has happened twice in history. 

First, in 1994, the Community Bankers U.S. Government Money Market Fund liquidated at $0.96 per share. 

Then more significantly, on September 16, 2008, the Reserve Primary Fund — which was then the third-largest money market fund in the country with $62.5 billion in assets — broke the buck. Its $785 million position in Lehman Brothers commercial paper became worthless following Lehman's bankruptcy. The fund's NAV fell to $0.97, triggering a $439 billion run across the money market fund industry.

Credit risk

Prime money market funds invest in corporate commercial paper, which carries the risk that the issuing company defaults. Government money market funds largely avoid this risk by investing in U.S. government securities, though they may offer slightly lower yields as a result.

Liquidity risk

 During periods of market stress, a rush of redemptions can force a fund to sell holdings at a loss, which can push the NAV lower and create a self-reinforcing cycle. The SEC's 2023 reforms addressed this by requiring institutional prime and tax-exempt funds to impose mandatory liquidity fees when daily net redemptions exceed 5% of net assets, and by increasing minimum liquidity requirements (daily liquid assets from 10% to 25%, weekly from 30% to 50%).

Yield vs. safety trade-off

Money market funds sometimes offer slightly higher yields than money market accounts, but the additional yield reflects the additional risk. For cash you can't afford to lose, the question is whether a small yield advantage justifies giving up FDIC insurance.

For everyday savings needs, money market accounts generally offer more straightforward access. You can transfer funds, write checks, or use a debit card without worrying about settlement times or liquidity fees. 

Money market funds are also liquid under normal conditions, but the access mechanisms are slightly more involved and can be disrupted during periods of financial stress.

Explore today's top money market account rates on Raisin

Money market funds and money market accounts serve similar purposes. They’re both good options for holding cash, earning a competitive yield, and preserving capital. However, they offer fundamentally different levels of protection. 

When it comes to cash equivalents safety, money market accounts are FDIC-insured bank deposits with a protected principal (up to $250,000 per depositor, per institution), while money market funds are investment products with no federal insurance. The risk of loss in a money market fund is very low, but it isn’t zero, and that’s worth noting.

Many savers find that for cash they’re counting on — including an emergency fund, a down payment, or cash earmarked for short-term goals — the protection of a money market account is a meaningful advantage. For investors looking to park excess cash within a brokerage account, a government money market fund can be a reasonable holding, but it's worth understanding that you're accepting a different risk profile.

With Raisin, you can compare money market accounts, high-yield savings accounts, and CDs across multiple federally insured banks and credit unions, all from a single login. Every deposit product on the platform is eligible for FDIC or NCUA deposit insurance coverage up to $250,000 per depositor, per institution, subject to certain conditions.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.