With the names sounding so similar, a money market account and a money market fund can be confusing at times to many people, and considered a different name for the same investment vehicle, when in reality they’re very different in spite of similar sounding names.

For a money market account, this is a savings account banks or credit unions will offer to their customers, where the difference is it’ll have a higher interest rate based on higher minimum balance requirements than a passbook savings account would, which usually has no minimum balance requirements.

A money market account’s funds will also be backed up by the Federal Deposit Insurance Corporation (FDIC), for up to $250,000 at this time, which could be brought back down to the normal $100,000, once the temporary higher protection may be lifted.

Another element of the money market account is you can only make up to six withdrawals a month, and in some cases also have check writing privileges of three a month for the account. Fees can be applied if you go beyond the limitations of the terms of agreement, so they should be read and understood so you aren’t charged unnecessary fees.

If you belong to a credit union, your capital in a money market account would be protected by the National Credit Union Administration, which is also a federal agency.

A money market fund on the other hand is a mutual fund which invests in short-term securities like U.S.Treasuries, commercial paper and CDs, among a number of others.

Although a money market fund has no guarantees for you capital, they rarely fall below their net asset value, although a recent case happened when it did, when Lehman Brothers collapsed last year and people lost money in their money market fund accounts. This is extremely rare, but it can happen.

Of course the slightly higher risk comes from slightly better returns.

Either one of these accounts should be used to place your backup capital for emergencies, where you can get almost immediate access to your money.

The trade-off between the two is a little less interest with absolute guarantee for your money in a money market bank account, while the money market fund will normally give you a better return with a little more risk, and no guarantee of your money.

While there is no investment without risk, a money market fund comes about as close as you can to meeting that criteria.

What is a money market fund?

A money market fund is nothing more or less than a mutual fund, which most of you reading this will understand. The difference in what the mutual fund invests in.

In the case of a money market fund, the law requires that it invests in securities that are low risk; things like certificates of deposit, short-term bonds, commercial paper and government securities.

As the money market fund does that, the goal is to keep the net asset value of the fund at $1 a share. Very seldom historically has it fell below that level at any money market fund.

Because money market funds invest in low-risk securities, the interest or dividends paid out are low, so are best used in certain situations where that type of pay out is conducive to existing living circumstances and conditions.

For example, in our current economic crisis it could be a good way to retain capital. Sometime we get into these type of difficult economic times, and we need to be defensive rather than offensive in our investment decisions. This is where money market funds can meet that particular need.

Temporary Guarantee Program
 
Under the Temporary Guarantee Program for Money Market Funds administered by the the U.S. Department of the Treasury, the Treasury Department guarantees the share price of participating money market mutual funds.

Here’s the guidelines stated by the SEC for those money market funds that would qualify:

As part of the program, all money market funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate. 

What are strategies to use money market fund?

So when would be good times to use a money market fund as part of your investment strategy?

If you think of investing as a marathon instead of a sprint, you would see that there are stages you start off on, and adjust to accordingly as age and circumstances change.

One example would be when you’re younger, middle aged and approaching retirement. When you get closer to retirement, conserving capital is more important than growing capital, so things like a money market fund are used by many in those conditions.

But age isn’t always a factor either for using a money market fund.

Let’s use a case of building up a ‘529 College Savings Plan.’ Similar to someone starting off in their investment strategy, you use more aggressive investment vehicles to build up your 529 College Savings Plan at the beginning, but as the time for college approaches, again, it’s conserving capital that is more important than building capital, so again, this is a place you could use a money market fund to fulfil that need.

The secret is to apply it to temporary or overall life circumstances. The beginning of an investment cycle should be aggressive, and as it gradually moves toward its end, think of using a money market fund manage your capital the final stages.