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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Money market account vs. fund investing
Dear Dr. Don,
I just opened a money market account but I would
like to know if a money market fund is better, and why?
Levi Lender
Dear Levi:
A money market account is a bank deposit and FDIC insured to the
limits of that insurance while a money market mutual fund is a mutual
fund that invests in short-term debt. It's not really a matter of
which is better; instead it's which is better for you. That's why
it's called personal finance.
Money market mutual fund managers work very hard to
avoid "breaking the buck," which means they try to keep
the value of a money market mutual fund share at $1. So, even though
money market mutual funds aren't insured, they're managed to protect
principal.
When investing in a money market mutual fund, you
can pick a fund based on the type of securities they buy. The first
decision is to choose between investing in taxable funds or tax-exempt
funds. Tax-exempt funds invest in short-term municipal debt where
the interest income is exempt from federal income tax and may be
exempt from state and local income taxes. Taxable funds invest in
short-term debt where the income is subject to income taxes.
Within the taxable category you can choose between
funds that only invest in U.S. Treasury securities, U.S. government
and agency debt, or corporate short-term debt. As you move from
Treasury-only funds to funds that invest in corporate debt, you
should see higher yields because you're taking on additional risk.
Consider the transaction costs and limits on check
writing when comparing money market accounts to money market mutual
funds. You don't want to put your money in a higher yielding account
only to see those earnings go toward paying account fees and expenses.
How you plan to use the account will influence what type of account
you want to open.
Bankrate allows you to shop money market accounts
and money market mutual funds using the money
market channel on its Web site. If you can earn as much or more
in a money market account as you can in the money market mutual
fund, I'd lean toward the bank deposit because of the FDIC insurance.
-- Posted: April 28, 2004
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