Many people think money market funds are as safe as bank deposits or certificates of deposit. Many people are wrong.
When you buy a CD or deposit money into a demand deposit (checking or savings) account, the government (FDIC) will insure your money up to a certain limit, usually no less than $100,000.
However with with money market funds that's not the case. Money market funds are mutual funds whose sole purpose is to act like a checking/savings accounts. Usually they pay interest. The main goal of a money market is to preserve wealth. A dollar buys one share and the money invested should always be worth be worth at least a dollar.
However, in the latest banking crisis, money market funds almost "broke the buck" meaning that a share would be worth less than a dollar. While the Fed acted in time to avert disaster, the possibility that this thing can happen in the first place should alarm those with large amounts invested in money market funds.
Remember there is no federal guarantee that you money is safe with money market account. Historically this has been the case, but you don't want to take chances. With a money market you have the worst of both worlds. You're not making as much money (typically) as a stock market mutual fund and you aren't insured against losses like a bank account.
Many mutual fund companies sell these money market funds as just as convenient as bank accounts but with higher interest. These accounts usually have a check writing privilege in order to emulate a bank account.
My advice is to steer clear of them. They are good for temporarily holding money that is on its way in or out of other funds. However, money market funds lack a good risk management strategy and good returns as mentioned above.
If you want a checking account or savings account stick to FDIC insured deposits at reputable banking institutions. If you want an investment, mutual funds may be an attractive option. However, I fail to see the advantages of money market fund for the Average Joe.
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