Money Market vs Mutual Fund

[readytorock]

What are the differences? The similarities?

I know (read: I think...) a mutual fund is many people sharing many different stocks and that the rate of return is usually all but guaranteed because of the diversification.

But I'm not sure what a money market account is or how it differs. Sorry for the newb question.

[disneysteve]

I know exactly what you are asking, but for the benefit of everyone, let me clarify something. "Mutual Fund" can encompass many different types of investments. "Mutual Fund" is just a type of account where funds from many investors are pooled and invested together. A mutual fund can invest in domestic stocks, foreign stocks, bonds, real estate, commodities, precious metals and stones and yes, there are even Money Market Mutual Funds (which is why I wanted to clarify your question).

What you are asking about, I'm assuming, is STOCK mutual funds.

A Money Market account invests in safe, stable, interest-producing instruments like government bonds and CDs. The goal of a money market is to generate income, not growth. The fund shares maintain a price of $1.00/share.

A Stock Mutual Fund invests primarily in stocks (though they usually hold some cash reserves as well). What type of stocks will depend on what type of fund. It may be US large companies, small companies, foreign companies, companies in a particular sector like tech or health care, or some combination of two or more of those things.

There are also Mutual Funds that invest in real estate (real estate investment trusts or REITs), bonds of varying maturities, precious metals, etc.

The rate of return of a stock mutual fund is definitely not "all but guaranteed". You are correct that it provides diversification, some more than others, but that in no way guarantees a particular return. Mutual funds can and do lose money.

I think that covers the basics to answer your question.

[noppenbd]

What are the differences? The similarities?

I know (read: I think...) a mutual fund is many people sharing many different stocks and that the rate of return is usually all but guaranteed because of the diversification.

But I'm not sure what a money market account is or how it differs. Sorry for the newb question.

They are really completely different investments. A money market account (different than a money market fund) is FDIC insured up to $100K, meaning it is a virtually risk-free investment. When I say risk-free, I mean there is no chance of default. Since there is no risk involved, the rate of return is low, currently about even with inflation or slightly above. Therefore, money markets (or high-yield savings accounts, which are another type of risk-free investment) are not good vehicles for building wealth, only for storing money that needs to be kept 100% safe (emergency cash or money that may be needed at any time).

A "mutual fund" is a relatively broad term that describes a whole host of products. The common denominator is what you mentioned about pooled risk. These funds could invest in US stocks, or bonds, or international stocks, or real estate, or commodities, or some combination. Each fund will have a prospectus that details what types of assets the manager intends to hold. When you own a share of a mutual fund, because the fund owns many different assets, some of your risk is reduced. For instance, if the mutual fund had owned Enron as 2% of its assets, when it went belly up the value of your mutual fund shares would have only dropped 2% rather than 100% if you had just bought the Enron stock directly. However, you still have risk with a mutual fund (and possibly a lot, depending on many factors). For instance, if the fund invests primarily in US stocks and the stock market drops 20%, your mutual fund may go down 20% or more. If the fund has a large holding of small US companies, it could go down 30% in a year. However, over time, holding stocks has proven to be a good way to make good returns. The long term trend is for stocks to return ~10% over 10-20 year periods. So a stock mutual fund might be a good way to save for retirement or college costs for a young child. Likewise, bonds have returned ~6% a year over time and tend to swing less wildly than stocks, and tend to go up when stocks go down. For this reason, as retirement or college approaches, many investors decrease their holdings of stock mutual funds, and increase their holdings of bond mutual funds.

Mutual funds can be owned inside regular brokerage accounts, IRAs, a Roth IRAs, 401ks, 403bs, or other types of accounts.

This is just the very basics, so I suggest you do a lot of reading before buying anything you don't understand. The LA Times has a great investor education page at:

Money Library - Los Angeles Times

I suggest you read the Investing section.

[jIM_Ohio]

Three things-

there is such a thing as a money market account
there is another thing such as a money market mutual fund
there are many other things called mutual funds (which have nothing to do with money markets).

In addition, I disagree with the comment that a money market account is FDIC insured. I would verify this if that is the reason for choosing a money market.

Disney got most of information I would provide.

Start with a mutual fund- an SEC type security which allows many small investors to pool their money together to invest in something. There is probably a better definition, but I'll stick with that for this post.

What the "something" is depends on the manager or fund company which "runs" the mutual fund.

A money market is an account at a bank or other institution which is considered a cash based investment. Returns will vary, but I think historical average for these accounts would be 3-4%. The money market can be ran at a bank, you put the money into the bank's money market, then the bank reinvests the money into CDs, bonds and other short term CASH based investments. In return the bank pays you interest on this money.

A money market mutual fund is similar to a money market account. Biggest difference is the mutual fund has to be registered with the SEC, and have a 5 letter symbol (ending with X) which is tracked on an exchange somewhere. The money market mutual fund would invest in the same things a bank's money market would, it is just registered with the SEC and would allow a person to track the progress via a brokerage account or similar.

It is possible (although highly unlikely) that the share price of a money market or money market mutual fund will change from $1. Another poster mentioned this, my understanding is the reason the accounts are NOT FDIC insured is because the share price can fluctuate (for example if government defaulted on bonds, and the money market owned those bonds, it would drop in value).

[readytorock]

Thanks so much, so it sounds like Money Market accounts won't do much better than 3-4%, so there is no advantage over using those instead of high-yielding online savings accounts, which are currently returning the same percentage.

[noppenbd]

In addition, I disagree with the comment that a money market account is FDIC insured. I would verify this if that is the reason for choosing a money market.

Check out Bankrate.com's list of money market accounts. They are all FDIC insured.

Money Market High Yield ( MMA ) and Savings Account Rates

[jIM_Ohio]

Check out Bankrate.com's list of money market accounts. They are all FDIC insured.

Money Market High Yield ( MMA ) and Savings Account Rates

technicality- is the FDIC insured account a money market account or a savings account? I think it is savings account which pays higher interest.

The difference to a person would be subtle. The difference to the bank is what they can do with the money once deposited. A money market fund/account suggests the bank will invest the deposits in cash vehicles, the savings account suggests the bank can loan the money out to someone else (for a mortgage, car, business loan or similar).

[noppenbd]

The difference between an MMA and a savings account may be semantics, but since there is a lot of confusion between MMAs and money market funds, I think it is important to point out that most (possibly all?) MMAs are FDIC insured. MMFs are definitely not, although they have traditionally been very safe. In cases where MMFs have lost a lot of money, historically the banks that issued them have subsidized the losses to prevent "breaking the buck" or allowing the share price to fall below $1. But there is no guarantee that this will continue in the future.