Money market accounts are a simple way to put your money to work without taking any risks. On the money market, you can get cash, make safe investments, and in some cases, even write checks. When compared to other ways to invest, the money market is not a good choice. Money market investing may be too costly and risky to reach your financial goals. In this article, we will discuss about disadvantages of money market in brief with examples for your better understanding.
Money market mutual funds put most of their money into short-term, low-risk debt instruments, which is good for investors. Money market mutual funds are an example of an asset that doesn’t change much in value. Whether or not a money market fund’s income is taxed depends on the types of securities it holds.
Disadvantages of Money Market
Money market mutual fund returns are lower than those of more volatile investments like stock and bond mutual funds because the investments they hold are safe and only last for a short time. This makes it more likely that they won’t keep up with inflation. This topic outlines disadvantages of money market which will assist you to achieve desired goals in your life.
Fees
When deciding if you want to open a bank account or not, you should think about the fees you might have to pay. A money market account costs money every month to keep open. Some banks will waive the fee if you keep a certain amount in your account every day or make a direct deposit, but others won’t.
If prices go up, your monthly interest on your money could go down. One of the disadvantages of money market accounts may be subject to fees or charges, which can eat into any returns on investment.
Fluctuating Savings Rates
Money market account interest rates change based on what the market says. This could be bad news because it makes it more likely that the interest rate will go down.
If that happens, your earnings will go down (which would be a good thing and could lead to more interest earned). The stock market makes people feel all kinds of different things.
FDIC Safety Net Uncertain
The FDIC will protect up to $250,000 of your bank money. Most of the time, the government does not protect mutual funds that invest in the money market. Money market mutual funds can be risky, and investors should be aware of this.
If someone had $20,000 in a money market account and the bank went out of business, this insurance would pay them back. If a fund did something similar, the government might not pay back an investment.
Better Growth Elsewhere
If you won’t need these funds for a while, you should think about other ways to save money that could be more profitable.
Purchasing Power can Suffer
If inflation is 4% and the return on the investor’s money market account is only 3%, the investor’s purchasing power goes down every year.
Withdrawal Restrictions
Like savings accounts, money market accounts only let you take out a certain number of dollars each month. Federal Regulation D said that these accounts could only have a maximum of six withdrawals per calendar month.
Because of the coronavirus outbreak, these restrictions have been lifted temporarily, but banks can still limit how much money can be taken out of money market accounts. Overdraft fees are another extra that could happen.
Limited Transactions
Most MMAs have a six-month grace period for withdrawals or transfers because of rules set by the federal government. By limiting withdrawals, MMAs are meant to encourage people to save. If you buy more than 6 things in a certain amount of time, you may have to pay fees or penalties. 5 If you take out more than six times in a given month, it may be hard to get to your money again. (Installing that new septic tank can’t wait until next month.)
Compared to savings accounts, checking accounts usually let you make as many transactions as you want. The liquidity of money market investments can be limited, which can make it difficult to access funds quickly which is a great disadvantages of money market.
Lost Opportunity
Even when the economy was bad, common stocks gave returns of 8–10%. Money market mutual funds usually earn between 2% and 3% per year, but investors could be missing out if they choose to put their money there. There is a big change in the chance of being financially successful.
Investopedia is not a place to get help with your own money, taxes, or investments. The advice may not be good for all investors because it is too general and doesn’t take into account different investment goals, risk preferences, and financial situations. Invested money may lose value. When deciding on a plan, investors can benefit from the advice of a professional.
Returns May Vary
Even though money market funds usually put their money into government bonds and other low-risk investments, they may sometimes take bigger risks to increase their investors’ returns. The fund may buy risky bonds or commercial paper in order to earn an extra tenth of a percentage point. Because of all the unknowns, the money market fund with the highest yield might not be the best choice.
It’s important to remember that a fund’s past performance doesn’t mean that it will do well in the future.In some places, the alternative money market could also be bad. If you choose to get cash from dividends or sale proceeds, your return could go down. When the stock market is down, putting dividends back into shares may cut into overall gains.
Inflation Risk
Inflation is a risk for money market funds. It means inflation makes money worth less in the future. Money market funds add to inflation because they don’t give back much.
If the inflation rate is 3% and the money market fund’s yield is 2%, the money in the fund is worth less. If you invest $100 and then spend $102, you will have less money to buy things than if you just spent $100.
Expenses Impactful
Even a small annual fee on a money market account could cut into the 2% or 3% return you could get. So, this could make it harder for people who work in the currency markets to track inflation. How much fees cut into returns depends on the type of account or investment vehicle.
Capital Risk
Even though money market funds seem to be safe, some of them have “broken the buck,” or dropped to less than $1 per share. Money market funds have a little more risk than savings accounts or certificates of deposit, but they are not insured by the FDIC.
It has a higher level of risk than other types of investments. Money market funds may be subject to interest rate risk, which can affect the fund’s returns shows disadvantages of money market.
Balance Requirements
Most of the time, MMAs have higher fees to open and higher minimum deposits than other bank deposit products like checking and savings accounts.
There could be a minimum balance that must be kept. To avoid having to pay the monthly maintenance fee, all of these things must be done. Before you open an account, think about whether you will be able to keep the minimum balance.
Frequently Asked Questions
Do Money Market Rates Change?
The FDIC says that the average annual percentage yield (APY) for a money market account is 0.14%. Money market account interest rates vary by bank and account balance. Interest rates on money market accounts can go up and down just like those on other types of savings accounts.
Are Money Markets Insured?
Yes. Both the FDIC and the NCUA cover up to $250,000 in money market accounts. The FDIC doesn’t cover mutual funds that put their money in money markets.
Is there a Penalty for Withdrawing from a Money Market Account?
Withdrawing cash from a savings account at an ATM is not against the law. From your money market account, you can take out as much cash as you want. In many money market accounts, you can’t write too many checks.
Conclusion
Read more about advantages of money market account to broaden your knowledge base. The side effect of liquidity is volatility. If the instruments in which the fund has invested are suddenly cancelled or taken away, the money market fund and its investors can lose a lot of money quickly. Check out these disadvantages of money market to broaden your horizons.