When looking for a safe investment vehicle to park your funds in, look no further than the money market account. These accounts resemble savings accounts, but have a lot more to offer. Money market accounts are basically investments made in the making and repayment of loans. They are typically offered by banks and brokerages for the reasonable price of $1 per share. The accounts usually require a minimum deposit amount to open, which varies among financial institutions. While relatively safe investment instruments, money market accounts do come with advantages and disadvantages that you should be aware of before opening an account.
Advantages
As mentioned earlier, investing in a money market account is a relatively safe investment. The accounts are practically liquid, meaning that once the account is open, you will have access to your funds within a short period of time. Some financial institutions that offer money market accounts also offer check writing services through the account. So, not only do you have almost immediate access to yur funds, but if you don’t touch them, they earn dividends as well.
The interest rates of the money market account benefits from the rise of interest rates as well. When the Federal Reserve increases the Fed Funds Rate, the interest rate of the money market account adjusts for the increase. This rate of return will always be dwarfed by that of riskier investments, but it will not vary as much as it does for riskier investments.
Disadvantages
The main drawback from investing in a money market account is that it usually isn’t insured by the FDIC. If the bank fails, then your funds are loss. This stems from the fact that money market accounts consist of shares similar to stocks. These shares have a value determined by the money market, or the market of money lending. Although those that manage these accounts try to keep the price around $1 per share, that price still can fall below that amount. In exchange for that risk, you receive a higher interest rate in comparison to the regular savings account.
The interest rates of a money market account can go down as well. As easy as the Fed Funds rate can increase, it can decrease just as easily. The money market account interest rate will adjust according to this decrease. The variability of the interest rate can also cause inflation to have a dramatic effect on your account. If the account doesn’t keep up with inflation, inflation take away any gains you see. It can eventually have a negative effect on the purchasing power of the funds in the money market account.
All things considered, money market accounts can still be a good portion of your investment portfolio. They offer interest rates higher than those of the average deposit account with the same relative ease in accessing your money. Even though the likelihood of losing your money is possible, it is a rather rare occurrence. Safety and accessibility should be the main factors in your consideration of investing in a money market account. It is an excellent way to diversify your portfolio without a lot of additional risk.
Resources
Nationwide – Money Market Comparison, http://www.nationwide.com/compare-money-market.jsp
Bank of America – Money Market Funds, http://corp.bankofamerica.com/public/public.portal?_pd_page_label=products/investsolutions/moneymarket
JPMorgan Money Market Funds, https://www.chase.com/cm/crb/rfs/page/moneymarket.html