By Moez Sghaier
Updated August 18, 2024 4:22 p.m.
Is it more interesting to invest in a money market mutual fund compared to opening a traditional savings account? Let’s find out!
Protection against inflation
Thanks to the difference between the net asset value and the book value of the fund’s share every day, the investor would be able to collect some income by the end of the month. Even though that amount wouldn’t be that important. In fact, the investor would benefit from a modest income as to keep the purchasing power i.e. to protect him/herself against inflation even partially beside keeping his/her initial capital intact.
On the contrary, a savings account would give an income that is less than the inflation rate and loses its purchasing power over time.
As an example, income from a money market mutual fund (around 4.5 % currently) covers inflation rate (around 3.8% currently), while income from a savings account (around 0% and in the best case scenario less than 2% currently) doesn’t.
Liquidity
Thanks to the net asset value of a mutual fund, an investor can generally redeem some of his/her mutual fund shares almost automatically whenever there is a need to do so. For that to happen, the investor makes an order to redeem either online or over the phone and watch money coming to his/her checking account as early as the next business day.
As a general rule though, financial institutions impose restrictions in terms of the number of transactions allowed on their customers withdrawing from their savings accounts.
This makes a mutual fund way more liquid than a savings account.
Choice of titles held
The profile of a mutual fund in terms of risk/return allows an investor to choose the level of risk/return he/she is comfortable with. Once that level is set up (low return for low risk in case of a money market mutual fund), there are plenty of choices of how to reach that objective either by investing in fixed versus variable income assets or choosing a mixture of both.
A savings account, however, doesn’t allow the investor to choose any title whatsoever. By definition, cash in a savings account makes up 100% of the balance and there is no choice whatsoever regarding the choice of any titles held
Convenience of withdrawing money without having to pay fees
A financial institution doesn’t generally charge any fees for mutual fund redemption. Therefore, withdrawing from a money market mutual fund does not cost any withdrawal fees.
On the contrary, financial institutions do not allow their customers to withdraw from their savings accounts without paying fees i.e. losing some of their interest. Usually, a financial institution allows a savings account holder to withdraw money once a month without paying any fees. Beyond that, any withdrawal costs fees (a few dollars per transaction).
This makes a mutual fund way more beneficial than a savings account.
Having the feeling to control one’s own money
One of the biggest benefits of being a proprietor is to have complete freedom to sell something of your belongings. This is exactly what happens when you decide to redeem some or all of your mutual fund shares. In this transaction, you decide on everything: timing, holdings, quantities, etc. When this happens, one feels entirely free of all his/her actions and fully in control of his/her money.
When it comes to savings accounts, it seems as if the financial institution is in control of your own money as it sets up rules that do not allow you to withdraw money from your savings account without penalty and as you wish.
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