Question

Compare the balance sheets (composition of assets and liabilities) of banks and Money Market Mutual Funds (MMMFs). How are they similar and how are they different?

Answer 1

The primary difference between the two money market accounts is that the money you contribute into a Money Market deposit account is insured by a government agency (FDIC) just like bank accounts are, and you are not at risk to lose your investment like you are with the mutual fund version.

A balance sheet (aka statement of condition, statement of financial position) is a financial report that shows the value of a company's assets, liabilities, and owner's equity on a specific date, usually at the end of an accounting period, such as a quarter or a year. An asset is anything that can be sold for value. A liability is an obligation that must eventually be paid, and, hence, it is a claim on assets. The owner's equity in a bank is often referred to as bank capital, which is what is left when all assets have been sold and all liabilities have been paid. The relationship of the assets, liabilities, and owner's equity of a bank is shown by the following equation:

Bank Assets = Bank Liabilities + Bank Capital

A bank uses liabilities to buy assets, which earns its income. By using liabilities, such as deposits or borrowings, to finance assets, such as loans to individuals or businesses, or to buy interest earning securities, the owners of the bank can leverage their bank capital to earn much more than would otherwise be possible using only the bank's capital.

Assets and liabilities are further distinguished as being either current or long-term. Current assets are assets expected to be sold or otherwise converted to cash within 1 year; otherwise, the assets are long-term (non current assets). Current liabilities are expected to be paid within 1 year; otherwise, the liabilities are long-term (non current liabilities). Working capital is the excess of current assets over current liabilities, a measure of its liquidity, meaning its ability to meet short-term liabilities.

When you hear or read about Money Market Accounts – the first thing that probably comes to mind is the Money Market Mutual Fund. There are differences between the Money Market Mutual Fund and the Money Market Deposit Account though, and if you're looking to invest your money and maximize your earnings, understanding the differences between the deposit account and the mutual fund version of money markets can help you decide which one will be more beneficial to you – or help you decide that you want one of each type, if you are looking for additional ways to diversify your portfolio.

Money Market Mutual Fund: The Investment With Risk

The mutual fund version of money market accounts are not insured by the FDIC. They have expenses and can decline in value – in other words, you can lose the money you invest in a money market mutual fund. Money Market mutual funds invest in short-term, fixed income investments like U.S. Treasuries, which mature in less than one year. The potential is good for higher returns than the typical savings account could give you.

A major advantage of Money Market mutual funds as investments is that they have a high level of liquidity and flexibility. Most of the accounts allow you to write checks or make ATM withdrawals from your account balance if you need to access the money you have in them.

Money Market Deposit Accounts: The FDIC Insured Investment

There are some similarities between the Money Market mutual fund and the Money Market deposit accounts. Like the mutual fund investment, the Money Market deposit account also invests your money into short-term, fixed income investments and offers higher rates of return over the standard savings account. You are unlikely to find a savings account online or off that offers the same interest percentage rates offered on a money market deposit account. You can access your money through ATM cards or checks in most cases, too, which makes it useful for people who want to earn interest on their investment while still having access to the money without having to pay early withdrawal fees or penalties in the event of an emergency.

The primary difference between the two money market accounts is that the money you contribute into a Money Market deposit account is insured by a government agency (FDIC) just like bank accounts are, and you are not at risk to lose your investment like you are with the mutual fund version. Money Market deposit accounts offer FDIC insurance up to $100,000 per depositor, per bank (although through December 31, 2009, the limits have been raised to $250,000 per depositor, per bank.

Investing in either money market funds or money market deposit accounts can be a little confusing. The similar names can make it difficult for people who are new to the world of investing to keep the two investment vehicles straight! To make matters even more complicated, Money Market mutual funds and Money Market deposit accounts are often offered through the same financial institution. When choosing Money Market mutual funds, you'd want to review the prospectus just as you would any other mutual fund investment, as well as the risks and fees associated with the account; and when choosing a Money Market deposit account you would want to understand the amount of FDIC coverage you receive, as well as any limitations for withdrawing money or writing checks against the money in the account.