Insider Jeff Fleming

Money Market Accounts:
What You Didn't Learn in School

Money market accounts, treasury bills, and mutual funds, oh my! Jeff helps you wade through the muddle of them all, plus CDs, IRAs, and bonds.

Dear Jeff:
What is a Treasury Only Money Market Fund? Is it better than a CD or a regular mutual fund?

Jeff Says:
First, let's go over the terminology. Money market accounts are like super-charged checking accounts: they're very safe, highly liquid accounts into which investors' short term money should be deposited. They are ideal for use as an emergency fund and earn the investor interest, determined by the interest rates paid on the market for the underlying assets.

The actual securities held by money market accounts are very short-term debt securities, banker's acceptances, commercial paper, and Treasury Bills with a short maturity, often 30 days or less. Treasury Bills are negotiable debt obligations issued by the U.S. government, and backed by its full faith and credit, with a maturity of one year or less; the interest received is exempt from state and local taxes.

A money market fund is simply a money market account offered by a mutual fund company. It invests only in the same type of securities making up money market accounts. The difference between them, of course, is that only those money markets administered by banks are FDIC-insured. The fund's net asset value remains a constant $1 per share to simplify accounting, but the interest rate does fluctuate.

I am sure that you have now figured out that a "Treasury Only Money Market Fund" is a money market account offered by a mutual fund company that invests only in treasury bills. The interest rate earned on this money market fund may be slightly higher than typical money market funds if it owns T-bills with a longer maturity.

A Certificate of Deposit (CD), on the other hand, is an interest-bearing, FDIC-insured debt instrument offered by banks and savings and loans. CDs also provide the investor with a very low risk--and a corresponding lower rate of return. CDs come with a variety of maturities, ranging from one week to five years or more. There is usually an early withdrawal penalty for cashing in your CD prior to the maturity date.

The interest rates paid on money market accounts and CDs are typically very similar. CDs with a longer maturity may offer slightly higher rates, but the downside is the penalty that you might incur for withdrawing your money prior to the maturity date. If you think you may need the money you're investing, then stick with the money market fund.

More Advice: Bonds Held in IRAs