Are Money Market Accounts and Funds Safe?

Money market accounts and money market funds serve as short-term financial instruments, often utilized for cash management and liquidity needs. They generally offer lower volatility compared to other investment vehicles, aiming to preserve principal while providing modest returns. While both are associated with the “money market,” they possess distinct structures and regulatory frameworks that are important for consumers to understand.

Fundamentals of Money Market Offerings

Money market offerings consist of two types: money market accounts (MMAs) and money market funds (MMFs). MMAs are deposit accounts from banks and credit unions, offering check-writing, debit card access, and variable interest rates. MMFs are mutual funds investing in highly liquid, short-term debt instruments like U.S. Treasury bills, commercial paper, and certificates of deposit. Accessed through brokerage accounts, MMFs aim to maintain a stable net asset value (NAV) of $1 per share, distributing earnings as dividends. The key distinction is that MMAs are bank deposits, while MMFs are investment products.

Elements Supporting Stability

The stability of money market offerings stems from their underlying assets and regulatory oversight. Money market funds invest in short-term, high-quality debt securities, such as those from the U.S. Treasury, federal agencies, and highly-rated corporations. These instruments typically mature in less than one year, contributing to their low-risk profile.

Regulatory bodies maintain the stability of these offerings. Money market accounts are governed by banking regulations. Money market funds are subject to rules set forth by the U.S. Securities and Exchange Commission (SEC), specifically Rule 2a-7. This rule imposes strict requirements on the quality, maturity, diversification, and liquidity of MMF assets.

Operational structures also bolster the stability of money market funds. Many MMFs use amortized cost or penny-rounding to maintain their stable $1 NAV. The SEC also mandates specific liquidity requirements, requiring MMFs to hold a minimum percentage of assets convertible to cash quickly. Funds must hold at least 25% of total assets in daily liquid assets and 50% in weekly liquid assets to meet potential redemptions.

Investor Protections

Specific mechanisms are in place to protect investors in money market offerings. Money market accounts, being deposit products offered by banks and credit unions, are insured by federal agencies. The Federal Deposit Insurance Corporation (FDIC) insures MMAs at banks, and the National Credit Union Administration (NCUA) insures those at credit unions. This insurance covers up to $250,000 per depositor, per insured institution, for each account ownership category, safeguarding deposits against institutional failure.

Money market funds, as investment products, are not directly insured by the FDIC. However, if held within a brokerage account, the account may be protected by the Securities Investor Protection Corporation (SIPC). SIPC protects against the loss of cash and securities due to the failure of a SIPC-member brokerage firm, covering up to $500,000 in securities, including a $250,000 limit for uninvested cash. SIPC protection does not cover losses from a decline in the fund’s underlying investments due to market fluctuations. Beyond external protections, MMFs implement internal policies like diversification limits and strict credit quality standards to help preserve principal and manage risk.

Important Considerations for Investors

Investors should consider several factors when evaluating money market offerings. While money market accounts and funds generally offer competitive yields compared to traditional savings accounts, their returns typically track short-term interest rates. This characteristic means that yields may not always keep pace with inflation, potentially leading to a gradual erosion of purchasing power over time.

For money market funds, while rare, there is a theoretical potential for the net asset value to fall below $1 per share, a phenomenon known as “breaking the buck.” This has occurred in limited historical instances, primarily during periods of severe market stress. Recent regulatory reforms, including increased liquidity requirements and the elimination of redemption gates for non-government MMFs, aim to enhance stability and reduce the likelihood of such events, although some funds may impose liquidity fees under certain conditions.

Money market funds typically incur management fees and expenses, which can impact net returns. These fees are disclosed in the fund’s prospectus and should be reviewed. Both money market accounts and funds offer high liquidity, allowing easy access to funds. However, money market accounts may have transaction limits. MMFs might have redemption fees or other accessibility considerations during unusual market conditions.