Comparing Money Market Accounts and Mutual Funds
Although money market accounts and mutual funds are for the most part conservative capital investments, there are innate differences between the two financial instruments. The major difference between mutual funds and a money market account is the risk associated with them.
Depending on the type of investment, a mutual fund carries varied risks. For instance, a mutual fund that invests in equities only is risky because of the intertwined relationship to the stock market. If the stocks under-perform, the individual will incur a net loss in their investment.
Mutual funds that invest in bonds and fixed-income instruments are more closely related to money market funds in that they both guarantee a rate of return. However, these types of mutual funds are susceptible to fluctuations in interest rates and are not fully guaranteed.
Another major difference between a mutual fund and a money market account is that a mutual fund is not insured by the FDIC. Even mutual funds that invest in money markets are not insured. The investor's principal is always at risk, granted short-term debt instruments involved with the government or AAA rated corporations rarely default.
The fundamental difference found between the two financial instruments stems from the structure of the products. The typical mutual fund is a hand-selected basket of equities, chosen by a financial manager. The mutual fund is comprised of multiple stocks that incorporate numerous risks and exposures to various sectors of the market. The rates of return fluctuate based on the performance the stocks within the fund.
In contrast, a money market account is a conservative, fully-insured fixed-income investment. A money market account is a short-term loan given to government agencies or highly stable corporations. The investor makes a profit through the repayment of the loans and the interest rate attached to them.
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