Money market accounts vs. money market funds

Money market is a much-used term in the financial industry for a relatively low-risk method of investing. But what many investors don’t realize is that there are actually two ways to invest in money markets: by opening a money market account or by purchasing a money market fund in your brokerage account.

Money market accounts are like savings accounts, but they often have more attractive rates. Instead of being limited to investing in bank loans, the funds deposited into money market accounts are invested in low-risk, short-term securities like Treasuries, certain bonds, and cash equivalents.

Money market funds are not accounts. They’re like mutual funds in that they’re independent investment vehicles comprised of a group of underlying investments. Like money market accounts, money market funds are invested in short-term, low-risk cash securities like bonds and Treasuries.

Some money market funds are tax-exempt, as their underlying investments consist of municipal bonds. Money market funds pay a return in the form of a dividend. They can be purchased in almost any type of brokerage or retirement account and often offer a higher return than money market accounts.

Banking tips: This tip was originally posted on 5-10-2010 at 7:44 am.

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