Money market funds are not insured by the FDIC, 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 the same, but they have completely different protections.
If you have a money market fund through a brokerage or mutual fund company, the FDIC does not cover it. The fund holds short-term debt like Treasury bills and commercial paper, and if the fund loses value, you lose money. Your protection comes instead from the Securities Investor Protection Corporation (SIPC), which covers up to $500,000 per account if the brokerage firm itself fails — not if the fund's investments decline.
If you have a money market account at a bank, FDIC insurance does cover it. The bank holds the money directly, and the FDIC insures up to $250,000 per depositor, per bank. This is the same protection that covers your checking and savings accounts.
Key Takeaways
- Money market funds sold by brokerages and mutual fund companies are not FDIC-insured and can lose value if their investments decline.
- Money market accounts offered by banks are FDIC-insured up to $250,000 per depositor, the same as savings accounts.
- SIPC insurance on a brokerage account protects you if the brokerage firm fails, but does not protect you if the fund's value drops.
- The account type and where you hold it — bank versus brokerage — determines what insurance applies.
How FDIC insurance works on money market accounts
When you open a money market account at a bank, your deposits are insured by the FDIC up to $250,000. This limit applies per depositor, per bank. If you have $250,000 in a money market account and $50,000 in a checking account at the same bank, the FDIC covers both, but your total coverage is $250,000 across all deposit accounts at that bank.
The FDIC covers money market accounts because they are bank deposits. The bank holds your money and pays you interest. If the bank fails, the FDIC steps in and returns your deposits up to the limit. This is the same protection that covers regular savings accounts and checking accounts.
If you want to insure more than $250,000 in money market accounts, you can open accounts at different banks. Each bank's FDIC coverage is separate. A money market account at Bank A and a money market account at Bank B each get their own $250,000 limit.
What SIPC insurance covers on money market funds
If you buy a money market fund through a brokerage firm, SIPC insurance protects you if the brokerage firm fails and cannot return your assets. SIPC covers up to $500,000 per account, with a limit of $250,000 for cash. This means if your brokerage goes out of business, SIPC will return your fund shares or the cash value of those shares.
SIPC does not protect you if the fund itself loses value. If the money market fund's investments decline, your account balance goes down, and SIPC does not cover that loss. SIPC only steps in if the brokerage firm itself becomes insolvent and cannot give you back what you own.
Many brokerage firms also carry additional insurance beyond SIPC through private insurers. This extra coverage may protect you in scenarios SIPC does not, but it varies by firm. When you open a brokerage account, the firm will disclose what insurance applies.
Why money market funds carry investment risk
Money market funds invest in short-term debt instruments like Treasury bills, certificates of deposit, and commercial paper. These are generally low-risk investments, but they are not risk-free. If the borrower defaults or interest rates move sharply, the fund's value can drop.
In 2008, some money market funds "broke the buck" — their value fell below $1 per share — when the companies whose debt they held failed. Investors lost money. The funds were not insured because they are investments, not bank deposits.
A money market account at a bank, by contrast, holds cash. The bank pays you interest, but your principal is protected by FDIC insurance. You will not see your balance drop due to investment losses because there is no investment — the bank holds the money.
The difference between money market accounts and money market funds
| Feature | Money Market Account (Bank) | Money Market Fund (Brokerage) |
|---|---|---|
| Where you open it | Bank | Brokerage firm or mutual fund company |
| What it holds | Cash deposits | Short-term debt investments |
| Insurance type | FDIC | SIPC (if brokerage fails) |
| Insurance limit | $250,000 per depositor per bank | $500,000 per account ($250,000 cash) |
| Can the balance drop? | No (except for fees) | Yes, if investments decline |
| Typical interest rate | Lower, set by the bank | Varies with fund holdings and market rates |
When to choose a money market account over a money market fund
Choose a money market account if you want your principal protected and do not want to take investment risk. The FDIC insurance means your balance will not drop due to market conditions. You will earn interest, but the rate is set by the bank and may be lower than what a money market fund offers.
Money market accounts are also simpler. You do not need to understand what the fund invests in or monitor its performance. You deposit money, earn interest, and your balance stays the same unless you withdraw or the bank charges fees.
Money market accounts work well for emergency savings or money you need to keep safe while earning a small return. If you have more than $250,000 to save, you can spread it across multiple banks to keep all of it insured.
When a money market fund might make sense despite the lack of FDIC insurance
Money market funds may offer higher interest rates than bank money market accounts, especially when short-term interest rates are high. If you are comfortable with the small risk that the fund's value could drop, and you do not need FDIC insurance, a money market fund might earn you more.
Money market funds are also more liquid in some cases. You can usually sell shares quickly through your brokerage account, and the transaction may be faster than transferring money from a bank account.
If you already have a brokerage account for other investments, holding a money market fund there keeps your cash in one place. You do not have to move money between accounts to buy and sell other investments.
Frequently Asked Questions
If I have a money market fund and the brokerage goes out of business, do I lose my money?
Not necessarily. SIPC insurance covers up to $500,000 per account if the brokerage fails. The brokerage's assets are kept separate from the firm's own money, so even if the firm goes bankrupt, your fund shares should be returned to you. However, if the money market fund itself loses value before the brokerage fails, SIPC does not cover that loss.
Can I lose money in a money market account at a bank?
Your principal is protected by FDIC insurance, so you will not lose money due to market conditions or bank failure. However, the bank may charge fees that reduce your balance, and if interest rates fall, the interest you earn will decrease. Your balance can also go down if you withdraw money.
Are money market funds safer than stocks?
Money market funds are generally considered lower-risk than stocks because they invest in short-term debt rather than company shares. However, they are not risk-free and are not insured by the FDIC. A money market account at a bank is safer because it is FDIC-insured, but it may earn less interest than a money market fund.
What happens if a money market fund breaks the buck?
If a money market fund's value falls below $1 per share, you lose money on your investment. This happened to some funds in 2008. There is no insurance to cover this loss. SIPC only covers you if the brokerage firm fails, not if the fund's investments decline in value.
Can I have more than $250,000 insured in money market accounts?
Yes. The $250,000 FDIC limit applies per depositor per bank. If you open money market accounts at five different banks, you can have up to $250,000 insured at each one, for a total of $1.25 million in FDIC coverage. Each bank's coverage is separate.