personal finance  |  july 20, 2023

4 Reasons to Save in a Money Market Fund

Saving in a money market fund could be beneficial for your short-term financial goals.


Key Insights

  • If you’re saving for something you’ll need the money for in less than three to five years, saving in a money market fund may make sense for you.

  • Money market funds are ideal for short-term saving because they invest in highly liquid securities with the objective of capital preservation and income.

  • Money market fund yields are currently on the rise as they benefit from the Federal Reserve raising interest rates, increasing yield from about 0% to 4% or slightly higher.

Judith Ward, CFP®

Thought Leadership Director

Money market funds are a type of mutual fund that may provide higher income potential than a bank savings account and more flexibility than certificates of deposit (CDs).

If you have an investment goal, you likely know when you’re going to need the money and how long you’ll need it to last. If you’re saving for a goal that falls within the next three to five years, saving in a lower-risk investment with greater liquidity—such as a money market fund, bank savings account, or CD—may make sense for you.1 Money market funds don’t have the long-term growth potential of stock or bond funds; however, they are considered a more stable investment and can be especially useful for immediate- to short-term savings goals that you don’t want impacted by market volatility.

What is a money market fund?

A money market fund is a type of mutual fund that invests in short-term Treasuries and other money market instruments, including U.S. government securities and commercial paper. Due to the nature of the short-term investments, these are considered to be highly liquid, which means they can be exchanged for cash easily, giving investors access to their money when they need it.

Money market funds in general offer better yield than those available from a standard bank savings account. At the same time, the money market fund account will often accommodate some checkwriting privileges.

What is a money market account?

While they sound similar, a money market account and a money market fund are two different financial products. Unlike a money market fund, which is an investment asset, a money market account is a type of bank savings account that earns interest based on an annual percentage rate. Like other deposit accounts, money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC).

Comparing Money Market Funds, Money Market Accounts, and Certificates of Deposit

When saving for short-term goals, these three vehicles may make sense, but they have distinct differences.

Comparing Money Market Funds, Money Market Accounts, and Certificates of Deposit
  Money Market Fund Money Market Account Certificate of Deposit
Type Investment product Bank account Bank-issued savings certificate
Liquidity Gain access to the money at any time Gain access to the money at any time Hold funds for a set period of time2
Income and returns with yields Typically offer better returns than interest-bearing savings accounts May offer a fixed interest rate Offer fixed interest rates typically
higher than bank savings accounts
Risk Low-risk investment, but not insured by the FDIC Insured by the FDIC3 Insured by the FDIC3

2If you take money out of the CD before maturity, you might face an early withdrawal penalty.
3These accounts are insured (up to $250,000) by the FDIC against the risk of bank failure.

Why do people invest in money market funds?

1. Short-term goals. Money market funds are useful for short-term goals, such as saving for a vacation, a wedding, or a down payment for a house. In these cases, it may be more important that your savings hold their value over the shorter time period.

2. Maintaining an emergency reserve. Having money outside of retirement accounts can act as a personal safety net to get through financial hurdles, such as a period of unemployment or an unbudgeted large expense. We recommend an amount that could cover three to six months of expenses. The accessibility of money market funds makes them a good option.

3. Covering larger regular expenses. For example, many people pay property taxes, insurance premiums, or other larger expenses on an annual or semiannual basis using the checkwriting feature. An account earmarked for this purpose means there’s no surprise when those bills come due.

4. Parking assets. A money market fund may also be used as a place to park or transfer assets, such as an IRA rollover, while trying to decide how to invest those funds for the long term. They should not be used as a long-term investment vehicle.

Is a money market fund a good investment?

While money market fund yields are rising as they benefit from the Federal Reserve raising interest rates, money market fund investments aren’t ideal for long-term investing, as the returns tend to be much lower than stocks and bonds. The stability is what makes them appealing for the short term, but over time, the returns have not even kept pace with inflation.

Money Market Funds Offer Stability With Minimal Growth

Growth of $10,000 for 30 years ended March 31, 2023: Stocks provide higher long-term return potential when compared with bonds or money market funds/cash. However, money market funds provide investors with stability, even during market volatility.

Historically, the long-term returns on stock investments have higher potential than bonds and money markets.

Sources: T. Rowe Price, created with Zephyr StyleADVISOR; S&P; Bloomberg Index Services Ltd.; and FTSE. See Additional Disclosures. Past performance cannot guarantee future results. It is not possible to invest directly in an index. Chart is shown for illustrative purposes only. Stocks: S&P 500 Index, Bonds: Bloomberg U.S. Aggregate Bond Index, and Money Market Fund/Cash: FTSE 3-Month U.S. Treasury Bill Index. As of March 31, 2023.
“Bloomberg®” and Bloomberg Indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by T. Rowe Price. Bloomberg is not affiliated with T. Rowe Price, and Bloomberg does not approve, endorse, review, or recommend this product. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to this product.

Stocks offer greater growth potential.

Over a long-term horizon, stocks (or a combination of stocks and bonds, depending on one’s risk tolerance) provide a higher return potential when compared with bonds or cash. In the chart above, the green line represents a 60/40 allocation of stocks and bonds, which has generated significantly higher returns than an all-bond portfolio, or one invested in money market funds or cash, with less volatility than an all-stock portfolio.

How safe are money market funds?

There is little risk associated with money market funds. The U.S. Securities and Exchange Commission (SEC) mandates that only the highest credit-rated securities are available in money market funds. While money market funds are considered to be one of the safest investments, they have dipped below the target share value of $1 (known as “breaking the buck”) during a few volatile markets or due to changes in inflation and interest rates but have quickly recovered.

How long should you keep money in a money market fund?

The length of time you should keep investments in a money market fund will depend on your reason for using the fund. If you have moved your investments from stock funds to money market funds to try to avoid the effects of recent market volatility in your portfolio, it may be wise to consider gradually reinvesting back into a diversified portfolio, as it is impossible to time the markets and know exactly when it might be most beneficial to jump back in. In fact, research by the T. Rowe Price multi-asset investment team shows that rebalancing into stocks during a downturn historically improved results over the subsequent year, even if that adjustment was made a few months after the official market bottom.

How do I invest in a money market fund?

Investing in a money market fund is very similar to investing in any other mutual fund and may require a minimum investment, may have an expense ratio, and can generally be purchased through a brokerage or financial services firm or directly from the mutual fund company.

When saving for a financial goal, it’s important to make sure you’re utilizing the most beneficial investment type for your goal based on its time horizon. Money market funds make the most sense for short-term goals and generally should not be used for long-term investing, such as retirement.

Call 1-800-225-5132 to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information you should read and consider carefully before investing.

1Money market mutual funds, although not covered by the FDIC’s federal deposit insurance, tend to provide slightly higher yields than bank savings accounts and CDs over time. Banks may provide money market savings accounts, which are different than money market mutual funds.

Important Information

Past performance does not guarantee future results. All investments are subject to market risk, including possible loss of principal.  

Retail Money Market Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

Government Money Market Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 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. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

Additional Disclosures

S&P — The “S&P 500 Index” is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (SPDJI), and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (S&P); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones). T. Rowe Price’s product is not sponsored, endorsed, sold, or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product, nor do they have any liability for any errors, omissions, or interruptions of the “S&P 500 Index.”

FTSE — Source: London Stock Exchange Group PLC and its group undertakings (collectively, the “LSE Group”). © LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies. “FTSE®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license.

All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company that owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data, and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.

This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and is not intended to suggest that any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

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