Money Market Accounts vs. Money Market Mutual Funds

While sharing similar names, money market deposit accounts and money market mutual funds are structurally distinct vehicles with different risk profiles and regulatory frameworks.

Money Market Accounts (MMAs) A money market account (MMA) is a bank-deposit account that yields interest based on the bank’s short-term lending and asset mix. MMAs are highly secure: they are insured by the federal deposit insurance corporation (FDIC) (or the national credit union association (NCUA) for credit unions) up to $250,000 per depositor, per institution, per ownership category. Historically, MMAs were strictly governed by the Federal Reserve’s Regulation D, which capped “convenient” monthly transfers and withdrawals at six. Although the Federal Reserve suspended enforcement of this limit in 2020, many banks continue to impose transaction caps and charge excessive-use fees (typically $5 to $10 per transaction) or enforce account conversions for repeat violators. Interest earned on MMAs is taxed as ordinary interest income at marginal rates.

Money Market Funds (MMFs) A money market fund is an open-end mutual fund that invests exclusively in high-quality, short-term debt instruments, including U.S. Treasury bills, government agency debt, high-grade commercial paper, and short-term repurchase agreements (repos). MMFs are regulated under Rule 2a-7 of the Investment Company Act of 1940, which restricts their holdings to maximum dollar-weighted average maturities of 60 days.

Unlike MMAs, MMFs are securities and carry no government deposit insurance. They are designed to maintain a stable Net Asset Value (NAV) of $1.00 per share. The primary tail risk is “breaking the buck” — when the fund’s NAV drops below $1.00 due to default in the underlying portfolio, as occurred with the Reserve Primary Fund during the 2008 Lehman Brothers collapse. MMFs are categorized by their underlying holdings:

• Treasury Funds: Invest solely in U.S. Treasury debt and repos backed by Treasuries. The yield is typically lowest, but the interest is exempt from state and local income taxes in most jurisdictions.
• Government Funds: Invest in Treasuries, government agency debt, and repos. They carry negligible risk but interest is subject to state tax depending on the proportion of non-Treasury holdings.
• Prime Funds: Invest in corporate commercial paper and certificates of deposit. They offer higher yields but carry credit and liquidity risk. The SEC’s 2023 money-market reforms (effective October 2024) abolished the redemption gates that froze withdrawals in a panic and scrapped the old fee-and-gate regime. In their place, institutional prime and institutional tax-exempt funds now carry a mandatory liquidity fee when daily net redemptions exceed 5% of assets, and any non-government fund may levy a discretionary fee of up to 2% under stress. Institutional prime and tax-exempt funds also price at a floating NAV; retail and government funds still target a stable $1.00.
• Municipal Funds: Invest in short-term tax-exempt municipal debt, delivering tax-free yields that are highly efficient for top-bracket taxpayers in states like California and New York.