Yes, you can lose money in a money market account, but the risk depends on what you own inside it
A money market account itself—the deposit account at your bank—does not lose money due to market swings. Your bank holds cash and very short-term debt, and the balance stays what you put in (plus interest). But if you own money market mutual funds or money market funds inside an investment account, the share price can drop, and you can end up with less than you invested. The difference matters because the name is the same but the protection is completely different.
A money market deposit account (MMDA) at a bank is FDIC-insured up to $250,000. You cannot lose the principal. A money market fund (MMF) is not insured. It is a mutual fund that buys short-term bonds and commercial paper, and if those securities fall in value, your shares fall too. Many people confuse the two because banks market them with the same name and similar rates.
Key Takeaways
- A money market deposit account at a bank is FDIC-insured and cannot lose money, though the interest rate can change.
- A money market mutual fund is not insured and can lose value if the bonds or short-term debt it holds decline in price.
- During periods of rising interest rates, money market fund share prices typically fall because existing bonds become less valuable.
- If you want zero risk of loss, use a bank money market account; if you want higher returns, you accept the risk of a money market fund.
How a bank money market account protects your money
When you deposit money into a money market deposit account at a bank, that bank holds your cash and invests it in very safe, very short-term instruments—mostly Treasury bills and certificates of deposit. The bank pays you interest, but your account balance is may provide by the FDIC. Even if the bank fails, you get your money back up to $250,000.
The catch is that the interest rate is variable. Your bank can lower the rate whenever it wants, and many do when the Federal Reserve cuts rates. You will not lose principal, but you might earn less interest than you expected. If you locked in a 4.5% rate six months ago and rates have fallen, your bank may drop you to 3.8% on your next statement. You keep all the money you deposited, but the income shrinks.
How a money market fund can lose value
A money market mutual fund is a pool of investor money managed by a fund company. The manager buys short-term bonds, Treasury bills, and commercial paper—debt that matures in less than a year. You own shares of the fund, and the share price moves based on what those securities are worth on any given day.
When interest rates rise, existing bonds fall in value because new bonds now pay higher rates. If you own a fund holding bonds that pay 2%, and new bonds now pay 4%, your 2% bonds are worth less. The fund's share price drops. If you sell your shares at that moment, you lock in a loss. If you hold until rates fall again and bond prices recover, you may break even or gain. But there is no may provide they will recover before you need the money.
Money market funds are considered very low-risk because they hold short-term debt and the bonds mature quickly. But they are not risk-free. During the 2008 financial crisis, some money market funds "broke the buck"—their share price fell below $1—because the securities they held defaulted or lost value rapidly.
When money market funds are most likely to lose money
The biggest risk period is when the Federal Reserve is raising interest rates. As rates climb, the bonds already in the fund become less attractive, and their market value falls. A fund holding bonds that pay 1% loses value when new bonds pay 3%. The longer the bonds in the fund, the bigger the loss—but money market funds hold very short bonds, so the damage is usually small and temporary.
A second risk is credit risk: if a company or government that issued the short-term debt defaults, the fund loses money. This is rare for funds holding Treasury bills and high-quality corporate debt, but it happens. During economic crises, even short-term debt can become risky.
A third risk is that you might need your money during a down period and have to sell shares at a loss. If you buy a money market fund at $1.00 per share and rates rise, pushing the price to $0.98, you have lost 2% if you sell immediately. If you wait for rates to fall again, you might recover the loss—but waiting means you cannot access that money.
The difference in returns between the two
A bank money market account currently pays between 4% and 5.35% depending on the bank and the current rate environment. The rate is fixed for a period (usually 30 days to a year) and then the bank can change it. You earn that rate on your full balance, with no risk of losing principal.
A money market mutual fund pays a yield (the income from the bonds it holds) that is usually similar or slightly higher than a bank account—currently around 5% to 5.5%. But the yield is not may provide, and the share price can move. If you are chasing a higher yield, you are accepting the risk that the share price might fall.
Over very long periods, money market funds have historically returned slightly more than bank accounts because of that extra risk. But over short periods—especially during rising-rate environments—they can underperform or lose money while a bank account keeps your principal intact.
How to choose based on your risk tolerance
If you need your money to be completely safe and you do not mind a variable interest rate, use a bank money market deposit account. This is the right choice if you are building an emergency fund, saving for a down payment in the next year or two, or holding money you cannot afford to lose.
If you are comfortable with small, temporary losses and you want to maximize yield, a money market mutual fund might make sense—but only if you can leave the money alone for at least a few years. If you might need it in the next 12 months, the risk of being forced to sell during a down period is not worth the extra 0.5% in yield.
Some investors split the difference: they keep their emergency fund in a bank money market account and put longer-term savings into a money market fund or a short-term bond fund. This gives them safety where it matters and slightly higher returns on money they do not need immediately.
What happens if a money market fund does lose money
If you own shares of a money market fund and the share price falls, you have lost money on paper. Whether that loss becomes real depends on what you do next. If you hold the shares and the price recovers, the loss disappears. If you sell while the price is down, you lock in the loss and cannot recover it.
Money market funds are required to disclose their holdings and their share price daily. You can see exactly what the fund owns and what your shares are worth at any time. If you see the price falling and you are worried, you can move your money to a bank account or a different fund—but you will crystallize any loss if you sell below what you paid.
There is no insurance on money market funds. If the fund company goes out of business or the fund fails, you do not have FDIC protection. This is extremely rare, but it is a real difference from a bank account.
Frequently Asked Questions
Can a money market account at my bank go negative?
No. Your bank money market deposit account is FDIC-insured, so your balance cannot go below zero. The bank guarantees your principal. The interest rate can fall, but your money stays there.
Is a money market fund safer than a stock mutual fund?
Yes, money market funds are much safer because they hold short-term debt instead of stocks. But they are not as safe as a bank money market account because they are not insured and the share price can move. They sit in the middle: lower risk than stocks, higher risk than a bank account.
What should I do if a money market fund I own drops in value?
If you do not need the money soon, hold the shares and wait for the price to recover—it usually does when interest rates fall. If you need the money now, you have to decide whether to sell at a loss or delay your withdrawal. Do not panic-sell during a temporary dip if you can afford to wait.
Why would anyone use a money market fund if a bank account is safer?
Money market funds sometimes pay slightly higher yields than bank accounts, and some investors believe the extra return is worth the small risk. Also, money market funds are held in brokerage accounts, which some people prefer for consolidation or because they already have an account there.
Do I have to pay taxes on money market account interest?
Yes. Interest from both bank money market accounts and money market mutual funds is taxable income. You will receive a 1099 form at tax time showing how much you earned. The bank or fund company reports it to the IRS.