A money market deposit account and a money market fund sound like the same product described twice. They are different in the one way that matters most, and the similarity of the names does real damage.
The difference in one line
A money market account is a bank deposit. A money market fund is a mutual fund that holds short-term debt.
Everything else follows from that.
| Deposit account | Fund | |
|---|---|---|
| What it is | A deposit at a bank | A mutual fund |
| FDIC insured | Yes, within limits | No |
| Can lose value | No | Yes, rarely |
| Sold by | Banks and credit unions | Brokers, fund companies, banks |
| Return quoted as | APY | 7-day yield |
| Governed by | Truth in Savings, Regulation DD | Securities law and a prospectus |
Why the insurance distinction is the whole point
A deposit account is covered by the Federal Deposit Insurance Corporation within the published limits. If the bank fails, the insurance pays. That is the scenario the product is protecting against, and it is the scenario people buy it for.
A fund has no such coverage. It is an investment, and the balance is a number of shares multiplied by a share price that is intended to stay at one dollar. Intended is doing real work in that sentence: funds aim to hold a stable value and that aim has failed before. The phrase the industry uses is breaking the buck, and it exists because it has happened.
A fund held in a brokerage account may carry SIPC coverage, which is often mistaken for the same thing. It protects you if the broker fails and your assets go missing. It does not protect you against the investments themselves losing value. Those are different risks and only one of them is what FDIC insurance covers.
The FDIC sets out what a deposit is and what the coverage applies to on its deposit insurance pages.
Why the names are so similar
Both hold short-term, high-quality, interest-bearing instruments: the money market in the economic sense. Banks created the deposit account to compete with the fund, and borrowed the name while doing it.
So the shared word describes what the money is invested in, and says nothing about the legal wrapper around it. The wrapper is the part that decides what happens when something goes wrong.
Telling them apart on your own statement
Four checks, any one of which settles it:
- Does it have a share price and a ticker? A fund does. A deposit does not.
- Did you receive a prospectus? Funds are required to provide one.
- Is there an FDIC notice? Insured deposits carry one.
- Is the balance in dollars or in shares? A deposit is dollars.
A bank can sell you either. The institution is not the tell; the document is.
What our calculator assumes
Our money market calculator models a deposit account: a rate you enter, compounding you choose, and a balance that grows and never falls.
That model is wrong for a fund in a specific way. A fund’s yield moves continuously with short-term rates, there is no fixed rate to enter, and the possibility of loss is real even if it is remote. Projecting a fund with a fixed rate would quietly convert an investment into a guarantee.
If what you hold is a fund, the figure the calculator produces is still useful as an illustration of compound growth at that rate. It is not a projection of what the fund will do.
The yield comparison is not like for like
A fund has often paid more than a deposit account, and it is tempting to read that gap as a free improvement.
It is compensation. The extra yield exists because the fund carries a risk the deposit does not, and the deposit carries insurance the fund does not. Comparing the two on yield alone compares the returns and ignores the thing the returns are being paid for.
Which one suits you depends on how much the insurance is worth to you, which is a judgement about your situation. This site computes; it does not rank.
Whichever you hold, the yield is disclosed on a defined basis: deposit accounts under Regulation DD, calculated per Appendix A to Part 1030, and both are taxed as ordinary income in a taxable account.
Questions
- Which one is FDIC insured?
- The money market deposit account, because it is a bank deposit. A money market fund is a mutual fund, so it is not a deposit and carries no FDIC insurance, even when it is sold by a bank or held at one. A fund held in a brokerage account may have SIPC coverage, which protects against the broker failing and not against the investments losing value.
- Can a money market fund lose money?
- Yes. Funds aim to hold a stable value and that aim is not a guarantee. It has failed, rarely, and the phrase for it is breaking the buck. A deposit account cannot lose value in that way; the risk there is the bank failing, which is the risk insurance covers.
- Why would anyone choose the fund?
- Historically it has often paid more, and it can offer same-day liquidity inside a brokerage account. This site does not rank them. The point is that the extra yield is compensation for taking a risk the deposit account does not have, so comparing the two on yield alone compares the wrong thing.
- How do I tell which one I hold?
- Check whether the statement says deposit account or fund, whether it carries an FDIC notice or a prospectus, and whether the balance is quoted in dollars or in shares. A fund has a share price, a ticker and a prospectus. A deposit account has none of those.