The Difference Between Money Market Accounts and Money Market Mutual Funds
Posted by Gregg Killoren on October 16, 2008
Among the many unfortunate results of the credit crisis was the recent upheaval in money markets. Money markets are the short-term commercial paper and credit markets that financial institutions and businesses use to fund their operations. Money market funds also invest in government securities. Money market accounts are FDIC-insured time deposits offered by federally-insured banks, thrifts, and credit unions. Withdrawals from the account are limited to six per month, and three of those may be by check. Under the provisions of the recently-enacted Emergency Economic Stabilization Act of 2008, the deposit insurance per account offered by the FDIC has been raised from $100,000 to $250,000 until December 31, 2009. On the other hand, money market mutual funds are not federally-insured. Each share of such a fund is worth $1, and the fund is designed so that value never changes. Earnings from the short-term debt purchased by the fund are passed on to the fund investors in the form of dividends. These types of funds are generally viewed as secure because the funds only buys debt from companies that have the best credit ratings. Shareholders are allowed to write checks against their account.
The recent freezing of the commercial paper market and the resulting turmoil in the financial industry caused one of the largest money market mutual funds to report a loss in September 2008. The loss caused the value of the money market mutual fund to drop to 97 cents per share. This in turn caused a panic, as investors fled money markets, fearing other such failures, which are known as “breaking the buck.” On September 29, 2008, the U.S. Treasury Department intervened to offer insurance on money market mutual funds. The Treasury’s Money Market Fund Guarantee Program will insure all investor funds of a money market mutual fund as of September 19, 2008. The program is open for a full year, but begins with an initial three-month term, after which the Treasury Secretary has the discretion to continue the program up to September 18, 2009. Also, the program only covers those money market mutual funds that apply for coverage, and only the funds may apply, individual investors may not do so. Thus, if you wish to be in a money market mutual fund that is covered by the Treasury program, you must check with the fund to ensure that it has applied for coverage.
For more information about the Treasury’s Money Market Fund Guarantee Program, please click on this link to an explanation of the program in question-and-answer format.
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