Money market deposit accounts and mutual funds are a safe place to park your cash for a short period of time. But before you put a chunk of money into either one, make sure you understand:
Money market deposit accounts are a cross between a checking and a savings account. They earn a bit more than interest-bearing checking accounts, but restrict the number of deposits or withdrawals that can be made each month.
These deposit accounts are offered by banks and are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per person, per bank. As long as the balance in the account remains below the insurance limit, every bit of principal and interest earned on the account is 100% guaranteed. (To learn more about how your money is protected by the FDIC, read FDIC Insurance: How Safe Is Your Money?)
Like most safe investments, they won't make you rich. The rate of return paid on the accounts varies according to market conditions and the bank's standard rates, but in today's market, is usually only a tad higher than standard savings account rates. By and large, they generally pay a bit less than the rate of inflation.
Money market mutual funds are offered by investment companies. They are investment pools that buy safe, short-term securities, such as Treasury bills, certificates of deposit, and commercial paper. (Commercial paper is an IOU issued by a company that needs money in the short term to finance accounts receivable, inventories, or other short-term needs.) Unlike money market deposit accounts, but like other investment accounts, money market mutual funds are not federally insured.
The income earned on money market mutual funds will vary based on the performance of the underlying investments. But, because these investments are fairly safe, they don't pay high returns—although the yields are a bit higher than on money market deposit accounts.
Both money market deposit accounts and money market mutual funds are simply places to keep your money for the short term. They are not good places to put your money for long-term investment. Because they earn so little, parking long-term assets in a money market guarantees you'll lose buying power to inflation.
To decide which type of money market is best for you, consider your reasons for setting this money aside.
Money market deposit account. If you plan to use the fund to handle emergencies, or near-term bills, you might be best off with the money market account, where check writing is likely to be as seamless as it is at your local bank, so long as you make no more than the allowed number of withdrawals per month.
Money market mutual fund. If you're parking cash while you figure out where to better invest it, a money market mutual fund might be the better choice because you could then easily transfer those assets into a fund at the same company with a single phone call or click of the mouse.
To learn about more about investing and other money issues affecting families, visit Nolo's Personal Finance topic area.