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Money market fund vs. CD: Where to keep cash

Key takeaways

  • Both money market funds and CDs are considered relatively safe investments, potentially providing returns in the form of interest or dividends.
  • Money market funds are generally more liquid than bank or brokered CDs.
  • Interest rates on money market funds and CDs are influenced by the federal funds rate, which the Federal Reserve raises or lowers in response to inflation and other economic data.
  • The interest paid on a money market fund can fluctuate daily whereas the interest rate on a fixed-rate CD remains the same for the term of the CD.
  • CDs issued by a bank insured by the Federal Deposit Insurance Corporation (FDIC) are covered by FDIC insurance up to applicable limits, while money market funds are not FDIC-insured.

Looking for a relatively safe place to stash money and trying to decide between a money market fund and certificate of deposit (CD)? "Right now, both are offering great rates for investors looking to invest some of their short-term money," says Richard Carter, vice president of Fixed Income Products & Services at Fidelity Investments. Here's how to figure out which may make more sense for you.

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What is a money market fund?

A money market fund operates in much the same way as other mutual funds: It pools investors' money to buy a basket of securities. But instead of buying stocks, long-term bonds, and the like, a money market fund buys low-risk, short-term debt, such as US Treasury bills or commercial paper, with the objective of preserving principal and daily access to your money.

There are 3 different types of money market funds, each named for what they invest in: government,1 prime,2 and municipal or "tax exempt."3 Government funds invest in cash, US government securities, and repurchase agreements (to buy a security at a price and sell it back at an agreed-upon price) with US government securities and cash as collateral. Prime funds may invest in the same things but also corporate debt such as commercial paper and CDs. Municipal funds mainly invest in municipal securities and strive for income that is exempt from federal income tax and, in some cases, from state income tax.

A money market fund is an investment product (a security) and should not be confused with a money market account, also known as a bank money market deposit account, which is an interest-earning bank product insured by the FDIC that may come with a debit card or checks and may limit the number of withdrawals in a given time period. A money market fund is not a bank account, and seeks to preserve a $1.00 value per share, but it is not insured or guaranteed by the FDIC or any other government agency. It allows unlimited withdrawals, making it flexible, plus yields may edge slightly higher than rates on money market accounts, so be sure to compare.

What is a CD?

A traditional certificate of deposit obtained directly from a bank typically pays a fixed interest rate over a specified time period. In return for committing to leave your money in the CD for a certain number of months or years, its interest rate is generally higher than what is offered for a regular savings account that you can tap without paying an early withdrawal penalty. (Some banks offer variable-rate or step-up CDs with interest rates that change.) Typically, the longer the investment period, the higher the interest rate you'll earn. If you don't touch your CD until it reaches maturity, you get back your principal (what you paid for it) plus the interest. CDs are issued by banks and are insured by the FDIC up to $250,000 per depositor, per insured bank, for each account ownership category. If offered by brokerage firms, they are known as brokered CDs, which can be bought either as new issues or both bought and sold on the secondary market.4 Some brokered CDs are callable, which means the bank can redeem the CD on a specified date before the maturity date.

What are key similarities and differences between a money market fund vs. a CD?

Money market fund vs. CD: Key similarities and differences
  Bank traditional CDs Brokered CDs Money market funds
May be appropriate for Investors seeking potential greater returns on cash who are willing to commit to specific time periods Investors seeking potential greater returns on cash who are willing to commit to specific time periods Investors focused on preserving the value of their investment who prioritize access to funds over rate of return
Investment period (maturity) Varies months to years Varies months to years No time commitment required
Access Typically a penalty if withdrawn before maturity A trading fee and potential to receive less in sale proceeds than the original principal (par) amount of the CD Easily retrieve funds to get cash, pay a bill, or make another investment in your account
Growth potential Limited over the long term, but possible to ladder to diversify across different time frames and rates Limited over the long term, but possible to ladder to diversify across different time frames and rates Limited over the long term
Current rates & yields Not offered by Fidelity Research current rates and yields Research current rates and yields 
Earnings rate Normally fixed for the term Normally fixed for the term although some brokered CDs can be callable and may be redeemed by the issuing bank before maturity Normally changes daily
Earnings payment Typically principal and interest returned at maturity Interest can be paid at various intervals; principal is paid at maturity or on the call date if a callable CD is called by the issuing bank Dividends accrued daily, paid monthly (plus occasional capital gains)
Product insurance or guarantee FDIC FDIC Not insured or guaranteed by the FDIC or any other government agency
Potential tax benefits n/a n/a Municipal funds for taxable accounts (e.g., nonretirement)
Minimum investment $0 or more Typically $1,000 for a single brokered CD; Fidelity also offers fractional CDs with minimums and increments of $100 $0 or more

When might a money market fund make sense?

A money market fund may make sense for fast, flexible access to your cash. If you already have an account with a brokerage firm, you may choose to put your cash in a money market fund until you use it to, say, pay a bill or buy a stock or other mutual fund.

When might a CD make sense?

A CD might be a better option if you can keep cash locked up for extended periods. Perhaps you're saving for a big expense such as a home renovation and want to limit risk while earning a fixed rate of interest as long as you avoid early withdrawal penalties. You might be able to lock in a higher rate for a set period before interest rates tumble. "When considering which CD to buy: First determine your holding period, then look for the best rate," suggests Carter.

But a CD with an early withdrawal penalty, or the incursion of trading costs and potential to receive less in sale proceeds than the original principal amount of the CD, may not be the right choice when instant liquidity is important, like with emergency savings. "For this reason, make sure you have enough cash in highly liquid form to cover your typical expenses plus some amount in an emergency fund first before you start contemplating the potential for higher rates available on CDs," says Carter.

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1. 

You could lose money by investing in a money market 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 a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fidelity Investments and its affiliates, the fund’s sponsor, is not required to reimburse the fund for losses, and you should not expect that the sponsor will provide financial support to the fund at any time, including during periods of market stress.

Fidelity's government and U.S. Treasury money market funds will not impose a fee upon the sale of your shares.

2,3. 

You could lose money by investing in a money market 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. An investment in the fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fidelity Investments and its affiliates, the fund’s sponsor, is not required to reimburse the fund for losses, and you should not expect that the sponsor will provide financial support to the fund at any time, including during periods of market stress.

4. 

Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Your ability to sell a CD on the secondary market is subject to market conditions. If your CD has a step rate, the interest rate may be higher or lower than prevailing market rates. The initial rate on a step-rate CD is not the yield to maturity. If your CD has a call provision, which many step-rate CDs do, the decision to call the CD is at the issuer's sole discretion. Also, if the issuer calls the CD, you may obtain a less favorable interest rate upon reinvestment of your funds. Fidelity makes no judgment as to the creditworthiness of the issuing institution.

Investing involves risk, including risk of loss.

Past performance is no guarantee of future results.

For the purposes of FDIC insurance coverage limits, all depository assets of the account holder at the institution issuing the CD will generally be counted toward the aggregate limit (usually $250,000) for each applicable category of account. FDIC insurance does not cover market losses. All the new-issue brokered CDs Fidelity offers are FDIC insured. In some cases, CDs may be purchased on the secondary market at a price that reflects a premium to their principal value. This premium is ineligible for FDIC insurance. For details on FDIC insurance limits, visit FDIC.gov.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

The third-party trademarks and service marks appearing herein are the property of their respective owners.

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