Are money markets the same as bonds?
The money market is part of the fixed-income market that specializes in short-term government debt securities that mature in less than one year. Buying a bond is effectively giving the issuer a loan for a set duration; the issuer pays a predetermined interest rate at set intervals until the bond matures.
In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year).
Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).
Short-term bonds are likely to offer higher potential yield than cash equivalents and are also typically less sensitive to interest-rate movements than other securities.
What is the 7-day yield? The 7-Day Yield represents the annualized fund yield based on the average income paid out over the previous seven days assuming interest income is not reinvested and it reflects the effect of all applicable waivers. Absent such waivers, the fund's yield would have been lower.
Money Market Funds
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
The money market refers to trading in very short-term debt investments. At the wholesale level, it involves large-volume trades between institutions and traders. At the retail level, it includes money market mutual funds bought by individual investors and money market accounts opened by bank customers.
Money market funds are also called money market mutual funds. While they sound similar in name, a money market fund is not the same as a money market account (MMA). A money market fund is an investment that is sponsored by an investment fund company.
Example. Anna has $190,000, set aside for emergencies. Therefore, she decides to deposit the sum in a money market account—she can withdraw the amount whenever she needs it. In addition, she would receive higher interest (compared to a savings account).
Which is safer bonds or money market?
Money markets are extremely low risk, with a typical par value of $1. Short-term bonds carry a greater degree of risk depending on the issuer, which may be a company, a government, or an agency.
Low Risk and Short Duration
As stated above, money market funds are often considered less risky than their stock and bond counterparts. That's because these types of funds typically invest in low-risk vehicles such as certificates of deposit (CDs), Treasury bills (T-Bills), and short-term commercial paper.
Short-term bond yields are high currently, but with the Federal Reserve poised to cut interest rates investors may want to consider longer-term bonds or bond funds. High-quality bond investments remain attractive.
| Bank | APY* | Great for |
|---|---|---|
| Sallie Mae Bank | 4.75% | Savers who can keep $100 in their account |
| UFB Direct | 5.25% | Savers who can maintain a $5,000 balance |
| Merchants Bank of Indiana | 5.00% | Savers who want a high APY with a low minimum deposit |
| Vio Bank | 5.30% | Savers who want the best APY |
Money market accounts work like other deposit accounts, such as savings accounts. As customers deposit funds in a money market account, they earn interest on those funds. Typically, interest on money market accounts is compounded daily and paid monthly.
Since money market funds are investment products, they're not insured against loss by the FDIC or NCUA. Your investment could lose money.
Money market funds seek stability and security with the goal of never losing money and keeping net asset value (NAV) at $1. This one-buck NAV baseline gives rise to the phrase "break the buck," meaning that if the value falls below the $1 NAV level, some of the original investment is gone and investors will lose money.
1. Federal Bonds. The U.S. Treasury and Federal Reserve (Fed) would be more than happy to take your funds and issue you securities in return. A U.S. government bond still qualifies in most textbooks as a risk-free security.
Many accounts have monthly fees
Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.
Vanguard Treasury Money Market Fund
This fund only invests in US Treasuries and repurchase agreements insured by the federal government, making it among the safest in a category of relatively safe investments.
What is the average return on money market funds?
We found that the median money-market fund returned 4.2% over the past year, compared with 0.49% annualized over the 10 years before 2022. (All returns are presented after subtracting annual fees.)
You could lose money by investing in a money market fund. Although the fund seeks to preserve the value of your investment at $1 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
A money market account is a type of account offered by banks and credit unions. Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners. Money market accounts tend to pay you higher interest rates than other types of savings accounts.
Because you earn higher interest rates than with a traditional savings account, a money market account can be a great choice to set aside some emergency cash or start building your savings. And unlike a traditional savings account, you have more options for withdrawing your money when you want it.
Investing in money market funds is a simple process. Firstly, you need to choose a mutual fund company or financial institution that offers money market funds. Then, you need to fill out the necessary application forms and provide the required KYC (Know Your Customer) documents such as Aadhar Card and PAN Card.
