Is there any risk in a money market account?

Yes, money market accounts do come with a few risks: Inflation risk: If your interest rate is lower than inflation, the funds in your account are losing purchasing power. Monthly fees: Some money market accounts charge a monthly fee.

What are the disadvantages of money market funds?

A few disadvantages of a money market fund are: Inflation risk: If the inflation rate is higher than your interest rate, you could lose money on your investment. Monthly fees: Many money market funds come with some level of fees. Investment doesn't come with FDIC insurance: You could lose money if something in the fund goes awry. High yields: As an investor, higher returns tend to correlate with higher risks.

Is a money market account high or low risk?

Money market accounts are generally considered low-risk investments.

Are money market accounts safe in a crash?

Yes, if you work with an insured financial institution, the funds in your money market account will be protected up to $250,000 during a crashing market.

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What Are the Risks of a Money Market Account?

August 24, 2023

6 min Read

Written by Sarah Sharkey

Edited by Elizabeth Constantineau

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If you are looking for a place to stash your hard-earned savings, a money market account might make your shortlist. But before you commit to opening this type of account, it’s important to understand all of the risks and benefits attached. Keep reading to learn more.

What Is a Money Market Account?

A money market account is a type of deposit account, which is intended to store your savings safely. This type of account is available through banks and credit unions. Depending on the financial institution, a money market account can come with FDIC or NCUA insurance, which protects your funds for up to $250,000. Unlike a traditional savings account, money market accounts tend to come with extra access. For example, you might get a debit card or checks to spend the funds conveniently.

Risks of a Money Market Account

A money market account comes with some risks. Here are some to know:

Inflation risk: In some cases, the interest earned through a money market account is lower than inflation. If your interest rate is lower than inflation, the funds in your account are losing purchasing power.
Monthly fees: Some money market accounts charge a monthly fee. Luckily, you can avoid this inconvenience by choosing to work with a money market account that doesn’t charge a fee.

Benefits of a Money Market Account

Here’s a look at some of the benefits of a money market account:

FDIC or NCUA insurance is available: When you work with an insured financial institution, the funds in your money market account are protected for up to $250,000. Even during a crashing market, money market accounts are a safe choice.
Streamlined access: It’s easy to use the funds stored in your money market account. Depending on the account, you may have access to the funds through checks or a debit card.

What Is a Money Market Fund?

With very similar names, it’s easy to mix up a money market account and a money market fund. But the difference between these two products is significant.

A money market fund is a type of mutual fund. In general, these funds invest in short-term debt securities with low risk and low volatility attached. As the investor, purchasing shares in a money market fund involves purchasing a pool of securities. Many money market funds specialize in a specific type of security. A few common focuses include government securities, tax-exempt municipal securities, corporate debt securities and bank debt securities.

In general, money market funds are known to offer relatively low-interest rates over other fixed-income investment choices, like dividend stocks. But money market funds still attract investors looking for a relatively stable place to store their funds.

Risks of a Money Market Fund

Money market funds are investment vehicles, which means there are some risks involved. Here’s what to be aware of:

Inflation risk: In some cases, the investment return generated by a money market fund will fall below inflation. For example, if a money market fund is producing a return of 4% and inflation is sitting at 6%. In this case, the investor’s money is losing purchasing power.
Expenses: Many money market funds come with some level of fees. Too many fees can take a significant cut from the potential profits you would normally stand to generate.
Investment doesn’t come with FDIC insurance: Money market funds are an investment, which means that your funds are at risk of loss. Unlike putting your funds in a savings account with FDIC insurance, you could lose money if something in the fund goes awry.
High yields: A money market fund promising higher returns than average is usually dabbling in something risky. As an investor, higher returns tend to correlate with higher risks.
Lost opportunity: Based on the historical averages, money market funds don’t perform as well as stocks. If you opt for this lower risk, you may give up on potential returns you may have gained through another investment choice. Many consider this flaw as a big red flag for investors with a long time horizon. For example, if you are investing your funds for retirement, a money market fund might not be the right choice.
Not crash-proof: If you want to invest in a crash-proof investment, a money market fund isn’t the right choice. If the market crashes, it’s possible that money market funds will be impacted. And without FDIC insurance, this could mean significant losses for investors.

Benefits of a Money Market Fund

Of course, there are also some benefits attached to investing in a money market fund. A few include:

Lower risk: When compared to the stock market, money market funds tend to be known for less risk.
Higher yields possible: It’s often possible to tap into high yields through a money market fund rather than a money market account or other deposit product.

Final Take

Both money market accounts and money market funds are considered relatively safe places to store your money.

However, a money market account is undeniably safer due to the ability to obtain FDIC or NCUA insurance on your funds. If you are looking for absolute security and relatively high rates, a money market account might be the right move.

In contrast, a money market fund comes with a heightened element of risk. While a money market fund might be considered safer than buying individual securities, you’ll still have to be comfortable with some level of risk. If you have specific plans for the money in the near future, a money market account might be the safer choice.

FAQ

Here are the answers to some of the most frequently asked questions regarding money market accounts.

Is there any risk in a money market account?
- Yes, money market accounts do come with a few risks:
  - Inflation risk: If your interest rate is lower than inflation, the funds in your account are losing purchasing power.
  - Monthly fees: Some money market accounts charge a monthly fee.
What are the disadvantages of money market funds?
- A few disadvantages of a money market fund are:
  - Inflation risk: If the inflation rate is higher than your interest rate, you could lose money on your investment.
  - Monthly fees: Many money market funds come with some level of fees.
  - Investment doesn't come with FDIC insurance: You could lose money if something in the fund goes awry.
  - High yields: As an investor, higher returns tend to correlate with higher risks.
Is a money market account high or low risk?
- Money market accounts are generally considered low-risk investments.
Are money market accounts safe in a crash?
- Yes, if you work with an insured financial institution, the funds in your money market account will be protected up to $250,000 during a crashing market.

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