Money market funds are not FDIC insured, but money market accounts at banks are

The confusion starts with the name. A money market fund is an investment product sold by brokerage firms and mutual fund companies. A money market account is a bank deposit account. They sound like the same thing, but they have completely different protections.

If you have money in a money market fund, the Federal Deposit Insurance Corporation (FDIC) does not cover it if the company holding it fails. The Securities Investor Protection Corporation (SIPC) provides some protection—up to $500,000 per account—but only against the brokerage firm's insolvency, not against losses in the fund itself. If the fund's investments lose value, your money loses value with them.

If you have money in a money market account at a bank, the FDIC insures it up to $250,000 per depositor, per bank. This is the same protection that covers your checking and savings accounts. The bank invests your money in short-term, low-risk securities, but you are not exposed to those investments' performance. Your account balance is may provide.

Key Takeaways

  • Money market funds sold through brokerages are not FDIC insured and can lose value if their underlying investments decline.
  • Money market accounts offered by banks are FDIC insured up to $250,000 and work like savings accounts with a higher interest rate.
  • SIPC insurance on brokerage accounts protects you if the brokerage firm fails, but not if the fund's value drops.
  • The two products have different risk profiles: money market accounts are safe but offer lower returns; money market funds offer higher potential returns but carry investment risk.

How money market funds work and why they are not insured

A money market fund is a mutual fund that invests in short-term debt securities: Treasury bills, commercial paper, and certificates of deposit. The fund manager buys these securities and divides ownership among investors. When you buy shares in a money market fund, you own a piece of that pool of investments.

Because you own an investment—not a bank deposit—the FDIC does not cover it. The fund's value rises and falls with the value of the securities inside it. Most money market funds aim to keep their share price stable at $1.00, but this is a goal, not a may provide. If the underlying securities lose value, the fund can "break the buck," meaning the share price drops below $1.00 and you lose money.

This happened rarely but visibly during the 2008 financial crisis. The Reserve Primary Fund, one of the largest money market funds in the country, fell below $1.00 when one of its holdings—a Lehman Brothers security—became worthless. Investors in that fund lost money. The FDIC could not help them because they owned an investment, not a bank deposit.

How money market accounts work and why they are FDIC insured

A money market account is a deposit account offered by a bank or credit union. You deposit money, and the bank invests it in short-term securities on your behalf. You do not own the investments directly—the bank does. You own a deposit claim against the bank, just as you do with a savings account.

Because it is a bank deposit, the FDIC insures it. If the bank fails, the FDIC steps in and pays you up to $250,000. The bank's investment decisions do not affect your account balance. Whether the bank's Treasury bill portfolio rises or falls in value, your account shows the same balance plus whatever interest the bank has credited.

Money market accounts typically offer higher interest rates than regular savings accounts because the bank is investing the money in slightly longer-term or less liquid securities. But you bear none of that investment risk. The bank does.

The difference in interest rates and returns

Money market accounts at banks usually pay more interest than savings accounts but less than money market funds. The exact rates vary by bank and by market conditions, so there is no fixed comparison. What matters is the trade-off: the bank account is safe but pays less; the fund is riskier but has historically paid more.

Money market funds often yield more because they can invest in a wider range of securities and because they pass investment risk to you. If you want the higher return, you accept the possibility that the fund's value could drop. If you want the safety of FDIC insurance, you accept a lower rate.

During periods of very low interest rates, this gap narrows. During periods of high rates, money market funds may pay significantly more. Check the current rates at your bank and compare them to money market funds offered through a brokerage before deciding which fits your situation.

SIPC protection for money market funds held at a brokerage

If you own a money market fund through a brokerage account, you have SIPC protection, but it works differently than FDIC insurance. SIPC covers you if the brokerage firm itself fails and cannot return your securities or cash. The limit is $500,000 per account, with a $250,000 limit on cash claims.

SIPC does not protect you if the money market fund loses value. It only protects you if the brokerage goes out of business and your account is not returned to you. This is a real but rare event. Most major brokerages are well-capitalized and unlikely to fail.

SIPC also does not protect you if the fund company itself—the mutual fund company managing the money market fund—fails. In that case, your shares would be transferred to another fund company, but you would own whatever the shares are worth at that moment. If the fund has lost value, you have lost money.

When to choose a money market account over a money market fund

Choose a money market account if you want safety and simplicity. You know your money is FDIC insured. You do not have to monitor the fund's performance or worry about it breaking the buck. You can withdraw money whenever you want, just like from a savings account. The interest rate is may provide by the bank.

Money market accounts work well for an emergency fund or for money you need to keep safe while you decide what to do with it. They also work well if you have more than $250,000 at one bank and want to keep some of it insured. You can open a money market account at a different bank and get another $250,000 of FDIC coverage.

When to choose a money market fund over a money market account

Choose a money market fund if you are comfortable with investment risk and want the potential for higher returns. Money market funds can offer better yields, especially when interest rates are high. They also offer more flexibility if you are an active investor managing a brokerage account—you can move money between the fund and stocks or bonds without transferring between institutions.

Money market funds make sense if you have money you do not need immediately and you want it to earn more than a bank account would pay. They are less risky than stocks or bonds, but they are not risk-free. The fund's value can fluctuate, and in rare cases, it can drop below $1.00.

Frequently Asked Questions

Can a money market fund go to zero?

A money market fund can lose value, but it is extremely unlikely to go to zero. The fund invests in short-term, low-risk securities, and the fund manager is required to maintain high credit quality. However, the fund's value can drop if its holdings decline in value. In the 2008 crisis, the Reserve Primary Fund fell to $0.97, not zero, but investors still lost money.

Is a money market account the same as a savings account?

A money market account is a type of savings account. Both are FDIC insured, both earn interest, and both let you withdraw money. Money market accounts usually pay higher interest because the bank invests the money in slightly longer-term securities. Some money market accounts also come with a limited number of checks or debit card access, while regular savings accounts do not.

What happens to my money market fund if the brokerage goes out of business?

SIPC will transfer your shares to another brokerage firm. You will own the same number of shares, worth whatever they are worth at that moment. If the fund has lost value, you have lost money, but you will get back what your shares are worth. SIPC does not cover losses from the fund's performance, only losses from the brokerage's failure.

Can I lose money in a money market account?

No. Your money market account balance is FDIC insured and may provide by the bank. You cannot lose the principal you deposited. The only way your balance could go down is if you withdraw money or if the bank charges fees that exceed the interest you earn.

Why would anyone buy a money market fund if it is not insured?

Money market funds often pay higher interest rates than money market accounts, especially when rates are rising. Some investors also prefer them because they can be held in a brokerage account alongside stocks and bonds, making it easier to move money between investments. The trade-off is that you accept investment risk in exchange for potentially higher returns.