Parking Your Series A: Money Market Accounts vs Money Market Funds

If you’re like most of the founders and heads of finance we talk to these days who have recently raised a seed or Series A, you’re looking for a place to park your idle cash. You’ve likely explored a slew of different accounts such as money market accounts, money market funds, checking, and savings, all of which have different yields, minimums, fees, coverage, and more. If we’re being honest with one another, traditional banks intentionally overcomplicate it—we’re here to un-complicate it for you, so you can make the best decision for your organization, let’s dive in!

What is a money market account?

A money market account is just another word for a high-yield savings account or high-yield checking account that pays a higher interest rate than regular checking or savings accounts. As such, they typically come with higher minimum balance requirements. Money market accounts are FDIC insured up to $250,000 (standard) and typically come with same-day liquidity. They are offered by banks and credit unions and as such, come with all the basics you’d expect: ACH/Wires, transfers in and out, bill pay, recurring payments, debit cards…etc. It’s a great alternative to non-interest-bearing primary operating accounts.

What is a money market fund?

A money market fund or “money market mutual fund”, on the other hand, is an investment vehicle that holds short-term debt instruments such as treasury bills, certificates of deposit, commercial paper, and other government backed-securies. Unlike money market accounts, money market funds do not have FDIC coverage, however, they typically do have SIPC coverage up to $500,000. In general, money market funds generate higher returns (yield) compared to money market accounts, but come with less liquidity (often 2 - 5 day holds). 

Are money market accounts and money market funds FDIC insured?

Money market accounts are FDIC insured up to $250,000 per depositor, while money market funds are not FDIC insured. This means that if a bank fails, your money in a money market account is protected up to the FDIC limit, whereas your money in a money market fund is not. That said, money market funds typically come with similar a form of FDIC insurance, known as SIPC coverage, which protects the depositor for up to $500,000.

How do money market accounts and money market funds work?

Money market accounts are essentially traditional checking and savings accounts, except that they pay out higher yields, and subsequently come with higher balance minimums. Money market accounts generate (and pay out yield) by passing back some portion of the effective Federal Funds Rate that they receive from the Federal Reserve for holding your deposits.

Money market funds, on the other hand, operate much like an investment account. You purchase shares of a mutual fund, which holds treasury bills, certificates of deposit, and commercial paper. Each month, the T-bills and government bonds that those funds hold mature, resulting in a return, which is paid out to the fund’s investors (e.g. you). For a more in-depth look at the mechanics behind these accounts, check out the post on “Yield Built for This Moment”.

Is there principal risk with money market accounts and money market funds?

Money market accounts are fully liquid checking and savings accounts and are FDIC insured, the funds remain in the account and as such, there is no principal risk. Capital stored in money market funds, on the other hand, is invested into securities and as such, is subject to market risk—meaning that the fund's net asset value (NAV) can go up or down depending on the performance of the underlying investments and thus carries some level of principle risk. 

Do money market accounts and money market funds hold securities?

Money market accounts are deposit accounts, thus they do not hold securities, and the funds are not swept, they remain in the account at all times. Money market funds, on the other hand, do hold securities. A money market fund will invest in a variety of short-term debt instruments such as treasury bills, government and municipal bonds, and other commercial paper. 

Are money market accounts and money market funds liquid?

Money market accounts, like traditional savings accounts, are completely liquid, and as such funds can be accessed at any time. Money market funds on the other hand are semi-liquid, they typically come with holding periods during which the underlying investments are sold and must wait to settle before they can be accessed. This period is typically between two to five days, though some funds come with a 30-day lock-up, during which the funds are inaccessible. 

How to tell the difference between money market accounts and money market funds?

There are a handful of key differences between money market accounts and money market funds which make it easy to tell what the bank or financial institution is offering.

Money market accounts are:

• FDIC insured up to $250,000
• Fully liquid, so funds can be accessed anytime
• Fully operational, meaning they can be used in tandem with, or as a replacement for regular checking or savings accounts
• Yield bearing, through EFFR payments
• Not-swept, so they stay in the account and there is no principal risk

Money market funds are:

• Not FDIC insured, but are SIPC insured up to $500,000
• Semi-liquid, so funds must settle before they can be accessed
• Non-operational, meaning they’re not intended to be used as an operating account and as such have limited features
• Yield bearing, through maturity and coupon payments
• Swept, meaning they are invested into securities and come with principal risk

When should you store funds in a money market account versus a money market fund?

Money market accounts are a great alternative to traditional checking and savings accounts. They offer all of the benefits and banking features of these accounts, and they generate significantly more yield (100x in some cases). If you are looking for an operating account to satisfy your short-term capital needs, if you want to minimize principal risk, or if you have less than $5M dollars, money market accounts are the perfect fit.

If on the other hand, you don’t mind stomaching principle risk, and you have a sizeable chunk of money ($5M+) that you won’t need to access for at least the next month, then money market funds would be the better option because you can generate a higher return.

Ultimately, for most startups who have raised their Series A, the best solution is a mix of both money market accounts and money market funds. The money market account meets their short-term capital needs, while the money market fund helps maximize their idle cash.

Final thoughts on money market accounts and money market funds

Money market accounts and money market funds are both popular options for startups looking for places to store their Series A. Money market accounts are FDIC insured, generate yield, are fully liquid, and come with all the bells and whistles of a regular operating account. Money market funds, on the other hand, come with a limited feature set, are semi-liquid, and carry principal risk, but they generate higher returns (yield) than money market accounts. Ultimately, consider opening one of each to meet your short-term needs while maximizing your long-term outcome. Also, just in you’re wondering, we offer a money market account that pays 4.00% APY.