What is the return on a money market account

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A money market fund is a type of mutual fund that invests in cash and low-risk, short-term debt securities. Money market funds are considered one of the least risky investment vehicles available, generating income—usually on par with short-term interest rates—that may be either taxable or tax-exempt, depending on the investments held by the fund. Money market funds are highly liquid, and they’re generally used by investors to manage cash or short-term savings. Annual percentage yields (APYs) and account details are accurate of Sept. 22, 2022.

How Do Money Market Mutual Funds Work?

Like other kinds of mutual funds, money market funds assemble a portfolio of securities and sell shares to investors, who earn returns from the portfolio in the form of income and capital gains. Money market funds build portfolios of cash and cash equivalents like bankers’ acceptances, certificates of deposit (CDs), commercial paper, repurchase agreements, and U.S. Treasuries.

Generally speaking, there are three main types of money market funds, each of which invests in different kinds of securities. The majority of their investments are in securities, but they also hold cash and cash equivalents.

• Government money market funds buy short-term government Treasuries. These are mostly notes and bills but may also include bonds and repurchase agreements backed by Treasury notes and bills.
• Prime money market funds invest in corporate paper, bankers’ acceptances, short-term corporate notes and bank debt securities.
• Municipal money market funds buy municipal bonds and other debt securities. Earnings are usually exempt from federal income taxes and sometimes also state income taxes.

Some money market funds are designed for retail investors while others are only for institutional investors and require high minimum investments.

Because money market funds invest in debt instruments, they produce regular income that’s either taxable or tax exempt, depending on the type of security creating the income. Traditionally, money funds have aimed for a net asset value (NAV) of $1 per share, and any difference between the NAV share price and the earnings on the portfolio’s investments is distributed to fund investors.

With all investments, you run the risk of losing money. Money market funds, however, are widely considered one of the safest, lowest-risk and least volatile investment options.

Money Market Fund Fees

Money market funds charge fees in the form of expense ratios. The higher the expense ratio, the lower your returns—and when interest rates are low, expense ratios can really eat into your money market fund earnings.

In fact, recent low interest rates have motivated some companies to waive or reposition fees to maintain a zero or positive yield for their funds. Vanguard, for instance, has temporarily reallocated the expenses of the Vanguard Pennsylvania Municipal Money Market Fund to other funds within Vanguard.

“A year and a half ago, you were seeing money market funds paying over 1%, and now you’re seeing them paying almost nothing again,” says Scott Bishop, a certified financial planner (CFP) with STA Wealth Management in Houston. “Everyone right now wants security, they want protection, but they still want income. Some companies are rebating some of these fees because you can’t charge very much on 25 basis points and still pay an interest rate.”

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

Though they share similar names, money market accounts are different from money market funds. Money market accounts are a type of savings account offered by banks and credit unions that may provide better APYs and easier access to your money than conventional savings accounts. Unlike money market funds, money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC). This means you are guaranteed never to lose money as long as the amount is under your bank’s FDIC coverage maximum, generally $250,000. This stands in contrast to money market funds, which are investment products that may lose money over time. That said, you might still opt for money market funds over money market accounts if they offer a substantially higher yield. Because they invest in cash and cash-like securities, money market fund risk is minimal.

Origin of Money Market Accounts

Money market accounts were introduced in the early 1980s to compete with money market funds. Money market funds were established about a decade before to provide more competitive interest rates than bank accounts, whose rates were limited by the Federal Reserve. Because they were investment products, not banking products, money market funds were able to avoid Fed regulation and pay much higher rates of return. By the late 1970s and early 80s, runaway inflation and high interest rates meant that you could earn much better returns in money market funds than in bank savings accounts.

As money began flowing out of the banking system and into money market funds, Congress allowed banks to begin offering money market accounts that offered more attractive interest rates to help banks and credit unions compete with money market funds. Now, with the rise of high-yield savings accounts, be sure to compare rates across money market funds, money market accounts, and high-yield savings products to make sure you’re getting the best rate for your money.

Advantages of Money Market Funds

Money market funds are generally considered one of the most stable investments—they experience low volatility and are less prone to market fluctuations. Money funds are also more liquid than other investments with similar returns, such as CDs, because they allow you to withdraw cash or buy other investments quickly.

Money market funds are well diversified, and because some funds invest in securities whose interest payments aren’t subject to federal taxes (and sometimes state taxes), they can provide a tax-efficient income source.

Disadvantages of Money Market Funds

Because money market funds are investments and not savings accounts, there’s no guarantee on earnings and there’s even the possibility you might lose money. When interest rates are low, money market rates are also low, earning investors very little. Money market funds are not for long-term investing, and even when interest rates are higher, the money in a money market fund typically won’t outpace inflation.

“I’ve never had a time in my career when a money market fund had an interest rate higher than inflation,” Bishop says. “It’s a very good short-term place to keep money you need to keep liquid, but you will lose money in terms of the cost of the things you buy.”

Money Market Fund FAQs

What’s the Best Use of a Money Market Fund?

Money market funds are a good place to park cash you’ll need for a short-term goal or an emergency fund since you can access the money quickly. If you’re paying for a wedding in six months, for instance, you wouldn’t want to put the cash in the stock market and risk losing money in a market dip. For longer term goals, you’re better off investing in other vehicles to achieve a return that’s higher than inflation.

Are Money Market Funds Safe?

Money market funds invest in highly stable, short-term debt securities that are very low risk. As investments go, money market funds are generally considered quite safe, although they are not entirely risk free.

While money market accounts are FDIC insured up to $250,000 per account, per depositor, there’s no FDIC coverage on a money market mutual fund. Money market fund share prices do fluctuate, so you may have to sell shares for slightly less than you paid for them. That said, money market fund risk is historically very small.

What Is the Minimum Investment for a Money Market Fund?

Minimum account requirements vary by fund and may depend on how you invest. For instance, some money market fund minimums range from $500 to $5,000, but there may be no minimum if you’re investing through an individual retirement account (IRA) or if you set up recurring deposits.

What Happens to Money Market Funds If Interest Rates Go Negative?

Currently, experts think it’s unlikely that the Federal Reserve will instate a negative interest rate policy. That said, with the federal funds target rate at historic lows, some securities owned by a money market fund may have negative yields. If that happens, you may see fund companies waiving some expenses to keep the yields on their funds positive, although it may not be possible to avoid a negative yield.

How Do You Buy Money Market Mutual Funds?

You can buy money market funds in your online brokerage account or directly from a mutual fund firm. When shopping for the right money market fund, make sure you look beyond the rate.

“Especially in a low-rate environment, an account with a higher rate might not be the best if it is hard to access,” says Sean Pearson, a certified financial planner with Ameriprise Financial in Conshohocken, Penn. “Keep convenience in mind.”

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