Money Market Account vs. Money Market Fund: What’s the Difference?

Money market accounts (MMAs) are a type of savings account that is insured by the Federal Deposit Insurance Corp. (FDIC), while money market funds (MMFs) are a type of low-risk mutual fund that is insured by the Securities Investor Protection Corp. (SIPC).

Both types of account offer a low-risk way of saving money while earning modest returns, but there are several differences between them. A money market account and a money market fund can differ in terms of returns, fees, accessibility, and risk. Learn what factors to keep in mind when you decide which savings strategy is best for you.

Money Market Account vs. Money Market Fund: Overview

Money market accounts and money market funds are both low-risk ways to save money and earn modest returns. The main difference is that an MMA is an insured deposit account, while an MMF is an investment in a mutual fund. Money in an MMF is insured by the SIPC.

Money Market Account

Banks and credit unions offer money market accounts (MMAs) as a type of savings account, with up to $250,000 of insurance provided by the Federal Deposit Insurance Corp. (FDIC) (for banks) or the National Credit Union Administration (NCUA) (for credit unions). Some accounts require a minimum investment, but many don’t.

On average, money market accounts earn more in interest than high-yield savings accounts, although there are exceptions. Among the most competitive rates, the best savings account rates are often higher than the best money market account rates, according to Investopedia research.

MMAs allow you to write checks, which makes your money accessible. You may also use an ATM card to withdraw funds anytime. Although banks are not required to set limits on money market account transfers or withdrawals, some do. Carefully review your bank’s MMA rules to ensure that your withdrawal penalties won’t affect your returns.

Money Market Fund

A money market fund is a mutual fund that invests in cash, cash-equivalent securities, and debt-based securities that are generally considered low risk. These mutual funds invest in low-volatility holdings such as city and government bonds and Treasury bills. Federal regulations require money market funds to only invest in short-term securities, or those maturing in 397 days or less.

Money market funds are generally used as a holding place for funds that you intend to put into other, higher-return investments. As such, you open them when you have a brokerage account at an investment company such as Vanguard, Schwab, or Fidelity. Setting up a brokerage account is fairly straightforward. You typically enter your personal information and then fund the account.

Money market funds are either taxable or tax-exempt, depending on the assets in which they invest. The different types of money market funds are often based on their investments. They can be categorized as: 

• Government money market funds, including U.S. Treasury: These funds typically have 99.5% or more in cash, government securities, and/or repurchase agreements.
• Prime money market funds: Also called general purpose funds, these can include a broader range of assets, including cash, government securities, repurchase agreements, certificates of deposit (CDs), or notes.
• Municipal money market funds: These funds invest primarily in tax-exempt federal and municipal securities, which provide investors with tax-free income.

With some investment companies, you might need a minimum amount for an initial investment in a money market fund—such as $3,000.

Money Market Account vs. Money Market Fund: Key Differences

Money market accounts and money market funds have some critical differences, including their accessibility, taxation, fees, and risks. Let’s look at these differences in more detail.

Fund Availability

Because money market funds must be bought and sold like any mutual fund, they may not provide as much daily access to your money as a money market account. You might need to wait until the next business day to withdraw funds, and you’ll have to transfer funds from your brokerage account to your bank—unless you have a cash management or checking account with your investment company.

On the other hand, funds that you keep in a money market account are always available immediately. You may be given an ATM card to withdraw money from your MMA whenever you would like, including on weekends and holidays. Your MMA may even allow you to write checks, which you cannot do with an MMF.

Taxes

You’ll almost always pay taxes on returns that you earn in a money market account or money market fund. But you may be able to avoid federal taxes if you invest in a municipal money market mutual fund, and you might avoid state taxes if you invest in an MMF for your state of residence. Taxation depends on which type of securities the fund invests in. For example, many municipal MMFs can be tax-exempt.

Fees

Money market accounts could charge maintenance fees if your account drops below a specified amount. But you can reduce or eliminate maintenance fees by comparison shopping. 

In contrast, a money market fund typically charges an expense ratio, which is a percentage-based amount for management fees. This rate can range from about 0.08% to 0.40%. This fee is charged no matter how much money you invest in the fund. 

Insurance and Other Risks

Money market accounts are insured by the FDIC or the NCUA. Money in a money market fund is insured by the SIPC.

How Market Runs Affect Money Market Funds

In the past, prime and tax-exempt money market funds were vulnerable to national and international events, which led to runs by investors, which lowered the fund’s share values. In rare situations, this led to occasions when the money market fund’s value dropped below $1 per share.

The Federal Reserve and investment companies have had to intervene multiple times with money market funds—most recently, in early 2020—to prevent instability and further panic. As a result, new federal rules—the vast majority of which were enacted in the spring of 2023—reinforce money market funds overall and reduce volatility. 

Money Market Account vs. Money Market Fund: Example

Imagine you have $1,000 that you want to use to earn returns and save. You want to access the money without paying a penalty. But you also want to earn more than you would earn in a savings account.

If you put $1,000 into a bank’s money market account paying 4.85% interest, you’ll have earned $48.50 in one year, for a total of $1,048.50.

These funds are taxable, so you’ll also pay your income tax rate on $48.50. However, your principal and earnings are protected by FDIC or NCUA insurance for up to $250,000.

Now suppose you put your $1,000 in a money market fund paying 5% interest. In one year, you’ll have earned $50, for a total of $1,050.

However, the fund—like most funds—charges an expense ratio. The fund’s expense ratio is 0.11%. This adds up to $1.10, which you must subtract from your earnings. Your ending balance would be $1,048.90.

If the money market fund is tax-advantaged, you may not pay taxes on your earnings. And remember, your returns could potentially become volatile if major events occur, like a pandemic or international economic turmoil.

The Bottom Line

Money market accounts (MMAs) and money market funds (MMFs) are suitable if you’re seeking short-term, stable, liquid places to save money. An MMA might be ideal for a saver who wants their funds to have FDIC or NCUA insurance and wants the straightforward simplicity of a savings account with potentially more interest. An MMF might be a better option for someone comfortable with a mutual fund’s risks and rewards, or someone in a higher tax bracket who wants tax-advantaged returns.