Can You Lose Money in a Money Market Account?

When seeking safe places for cash, money market products often come to mind. However, whether you can lose money in a money market account depends on the specific product. The term “money market” refers to two distinct financial products: a money market account offered by a bank or credit union, or a money market fund, which is an investment vehicle. Understanding this distinction is crucial for assessing the level of risk involved.

Money Market Accounts: Bank Deposits

Money market accounts, offered by banks and credit unions, function as deposit accounts, similar to traditional savings accounts. These accounts typically provide slightly higher interest rates than standard savings accounts and may offer limited check-writing capabilities or debit card access.

These accounts are insured by federal agencies, making them exceptionally safe. Deposits at banks are protected by the Federal Deposit Insurance Corporation (FDIC), while those at credit unions are insured by the National Credit Union Administration (NCUA). Both agencies provide coverage up to $250,000 per depositor, per insured institution, for each ownership category. This insurance guarantees your principal will be returned, even if the financial institution fails.

Money Market Funds: Investment Vehicles

Money market funds are investment products, specifically a type of mutual fund, offered by brokerage firms or investment companies. These funds are not deposit accounts and are not insured by the FDIC or NCUA. Instead, money market funds invest in a portfolio of highly liquid, short-term debt instruments, such as U.S. Treasury bills, commercial paper, and certificates of deposit.

While money market funds aim to maintain a stable Net Asset Value (NAV) of $1.00 per share, there is a theoretical risk that the value could fall below this amount, an event known as “breaking the buck.” This can occur if the value of the underlying securities declines due to factors like credit risk, where an issuer of the debt defaults, or liquidity risk, making it difficult to sell assets quickly without incurring losses. The Securities and Exchange Commission (SEC) regulates these funds under the Investment Company Act of 1940, with Rule 2a-7 setting strict guidelines on the quality, maturity, and diversification of their investments to mitigate risk. Recent amendments to Rule 2a-7 have further increased liquidity requirements and modified fee structures to enhance fund resilience.

Factors Influencing Money Market Performance

The performance of both money market accounts and money market funds is significantly influenced by broader economic conditions, particularly interest rates. Changes in benchmark rates, such as the Federal Funds Rate set by the Federal Reserve, directly impact the interest rates offered by money market accounts and the yields generated by money market funds. When the Federal Reserve raises interest rates, money market products generally offer higher returns. Conversely, falling rates can lead to reduced earnings.

Inflation also plays a role in the real value of money held in these products. Even if the nominal principal is preserved, high inflation can erode the purchasing power of your money over time. Economic stability broadly supports the underlying securities held by money market funds, as a stable economy typically translates to lower default risks for the issuers of short-term debt.

Making Informed Choices

To make an informed decision, determine whether a product is a money market account or a money market fund. If principal protection is a priority, always verify the insurance status. Ensure the product is an FDIC-insured bank account or an NCUA-insured credit union account, as these federal assurances provide a safeguard against institutional failure, protecting your deposits up to the specified limits.

For money market funds, carefully review the product disclosures to understand their investment objectives, the types of securities they hold, and any associated fees or risks. While money market funds may offer slightly higher yields, they carry a degree of investment risk that insured bank accounts do not. Your choice should align with your financial goals, risk tolerance, and liquidity needs, prioritizing FDIC or NCUA-insured money market accounts for absolute principal safety.