Banks and money market funds are two well-known financial institutions that provide a wide range of financial services to both individuals and companies. Banks are conventional financial institutions that have been around for centuries. On the other hand, money market funds are newer financial entities that first appeared in the 1970s.

Both institutions serve critical roles in the financial system by mobilizing savings and directing them to investment and lending operations.

What Is a Money Market Fund?

A money market fund is one type of mutual fund. This type of fund invests in highly liquid, short-term financial assets. These instruments consist of monetary currency, cash equivalent securities, and debt-based assets that have a high credit rating and a short-term maturity (such as U.S. Treasuries). The purpose of money market funds is to provide investors with high liquidity. Also, they simultaneously expose them to a very low level of risk. There are two names for the same thing: money market mutual funds and money market funds.

MMA and money market funds are not the same things, despite the fact that their names sound very similar (MMA). An investment that is managed by a company that specializes in managing investment funds is known as a money market fund. As a result, there is no guarantee that the principal will be refunded.

A money market account is one variety of interest-bearing savings accounts that can be held by an individual. Financial organizations typically provide customers with the opportunity to open a money market account. They are protected against loss by the Federal Deposit Insurance Corporation (FDIC), but their ability to conduct certain types of transactions is often restricted.

Joining

There are different ways to join a bank and a money market fund. Most banks have many branches in different places, making it easy for customers to use their services. To join a bank, an individual or business must go to the nearest branch, fill out an account opening form, show proof of identification, and meet other requirements, such as making a minimum deposit and providing reference letters.

On the other hand, joining a money market fund is a bit complicated because these funds are often offered by investment firms that require individuals or businesses to meet certain qualifications. This can be such as having a high net worth and being an experienced, investor. The qualifications may vary depending on the fund’s investment objective, risk profile, and other factors. So, investors may need to go through an investment advisor to join a money market fund. The advisor will evaluate the investor’s needs and suggest funds that match them.

Account Opening

How banks and money market funds open accounts are also different. Banks offer current accounts, savings accounts, fixed deposit accounts, and other types of accounts, depending on the services they offer and the needs of their customers. To open an account at a bank, a person or business needs to show proof of who they are and where they live. Also, they meet other requirements like making a minimum deposit and paying account maintenance fees.

On the other hand, money market funds give investors a variety of ways to invest, such as money market accounts, money market funds, and other short-term options. To open an account with a money market fund, an investor must meet certain requirements, such as a minimum investment amount and other eligibility criteria that depend on the fund’s investment goal and risk profile.

Savings Accounts 

Banks, credit unions, and other types of financial institutions typically provide customers with the option to open savings accounts. When you are putting money away for a significant purchase or for the future, they are a good option. This is because they are both secure and easy to keep that money in the interim.

Savings accounts, due to the high degree of liquidity they offer, are particularly perfect for demands that are more immediate in nature. Because of this, many people choose to store their funds for unexpected expenses in conventional savings accounts.

These kinds of bank accounts earn money in the form of interest, which causes their balances to increase incrementally over time. They often offer lower interest rates than any other sort of savings vehicle, such as money market deposit accounts or mutual funds, despite the fact that certain online banks do offer high-yield savings accounts with interest rates that are more competitive than those offered by traditional banks.

Savings accounts, in addition to money market deposit accounts, can be insured by either the FDIC or the NCUA.

Lending

Another important thing that banks and money market funds do is lend money. Customers can get personal loans, business loans, mortgages, and other types of loans from banks. This depends on the services the bank offers and what the customer needs. The loans that banks give out depend on how big the bank is. In addition to that, how willing it is to take risks, and how the market is doing. Before giving loans, banks also look at a customer’s credit history, collateral, and other factors.

Money market funds don’t lend money because their main purpose is to invest for the short term. But some money market funds may take part in the lending market indirectly. This can be done by buying short-term debt securities from banks and other financial institutions. These institutions then use the money to help them lend.

Investment

One of the main things that banks and money market funds do is invest. Banks invest their customers’ deposits in things like loans, securities, and other investment vehicles. This is in order to make money back and keep their business running.

The investment portfolios of banks vary based on the size of the bank, its willingness to take risks, and the state of the market. Some banks also offer investment services, like brokerage, wealth management, and other advisory services, to their customers.

On the other hand, money market funds invest in short-term debt securities like treasury bills, commercial paper, and other low-risk assets. The purpose of this is to generate profits and provide investors with access to cash.

Depending on the fund’s investment goals and risk profile, money market funds’ investment portfolios are often spread out to minimize risks and maximize returns.

Investors who might consider money market funds

Customers that fit the following profiles may benefit from money market funds:

            •           Create a goal for your investments that has a short time horizon.

            •           Have a low-risk tolerance or want to diversify their holdings with a more cautious investment.

            •           It is necessary for the investment to have a high degree of liquidity.

Even though the returns on money market funds are typically lower than the returns on other forms of fixed-income funds, such as bond funds, the goal of money market funds is to provide stability. As a result, they can be an important component of a diversified investment portfolio. There are a few applications for money market funds that investors might pursue:

            • In order to mitigate the normally higher levels of risk associated with bond and stock investing.

            • As investments with a limited time horizon for assets that may become necessary in the near future (such as an emergency fund).

            •  To serve as a repository for assets while one waits for further investment chances to present themselves (such as in the core position for your brokerage account).

Evaluating a money market fund

A money market fund is a specific kind of fixed-income mutual fund that has very stringent maturity, credit quality, diversification, and liquidity requirements in order to help it achieve its goals of principal preservation and daily access for investors.

Customers should make sure that the characteristics of the money market fund they choose are in line with their investment goals and strategy before making a purchase.

            • The goal of the majority of money market funds is normally to offer current income while maintaining the fund’s principal.

            • Accounts other than retirement accounts that are not currently exempt from paying taxes can be good candidates for municipal money market funds.

Advantages of money market funds

            •           Stability

Within the mutual fund industry, investors widely regard mutual funds that engage in money markets as among the least volatile types of investments available.

            •           Liquidity

            •           It is simple to settle trades in other investments that you have made using your brokerage account or to collect funds from a money market mutual fund. In most cases, the assets will be ready by the following business day.

            •           Security

            •           Because of the limitations imposed by the federal government, the funds must only engage in low-risk, short-term assets. As a result, they are more resilient to shifts in the market than many other kinds of investments.

            • Because the duration of money market mutual funds is typically much shorter than that of longer-maturing bond fund investments, they are typically subject to less risk associated with fluctuating interest rates. The duration of money market mutual funds can be as short as a few months. It can also be as long as a few years.

            •           Diversification

            • Money market mutual funds often hold a wide variety of securities. Also, their exposure to any one issuer other than that of the United States Treasury is typically quite minimal.

            •           Potential tax advantages

            •There are some money market funds that invest in assets whose interest distributions are generally free from federal income taxes and, in some circumstances, state income taxes as well. These funds have the potential to be a source of consistent income that is also tax-efficient.

Conclusion

In a nutshell, banks and money market funds are both significant types of financial institutions that provide financial services to private customers and commercial enterprises. Both of these institutions are essential to the functioning of the financial system since they are responsible for collecting deposits and allocating those savings to activities that include investment and lending.

While banks are typical financial intermediaries that offer a wide range of products and services, money market funds are investment vehicles that focus on short-term investments. SACCOs are an alternative financial organization that fosters mutual cooperation and support among members. They are committed to offering financial services that are tailored to their needs and preferences.

References

Administration, N. C. (n.d.). HOW DO I KNOW MY CREDIT UNION IS. Retrieved from https://ncua.gov/files/publications/guides-manuals/NCUAHowYourAcctInsured.pdf

Ashford, K. (March, 2023). What Is A Money Market Fund? Retrieved from https://www.forbes.com/advisor/investing/what-is-money-market-fund/

BEATTIE, A. (September 2022). Money Market Fund vs. MMA vs. Savings Account: What’s the Difference? Retrieved from https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp#citation-9

FDIC. (March 2023). Deposit Insurance FAQs. Retrieved from https://www.fdic.gov/resources/deposit-insurance/faq/index.html

Fidelity. (n.d.). What are money market funds? Retrieved from https://www.fidelity.com/learning-center/investment-products/mutual-funds/what-are-money-market-funds

PROBASCO, J. (26 September 2022). Money Market Account: How It Works and How It Differs From Other Bank Accounts. Retrieved from https://www.investopedia.com/terms/m/moneymarketaccount.asp

Categorised in: General

This post was written by Cynthia Njoki

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