Why Bank Money Markets Beat Funds for the Average Saver

NEW YORK (TheStreet) -- Cash is pouring into money market funds run by brokerages and mutual fund companies, much if it siphoned from ordinary bank savings. Should regular folk join in?

Probably not. With the average money market fund yielding only 0.04%, you might well do better in a money market account at a bank. They average 0.12%, according to the BankingMyWay.com survey. And, although money market funds have an excellent safety record, they don't provide the FDIC guarantee against that you'd get at the bank.

To be clear: Money market funds are offered by brokerages and mutual funds, while money market accounts are provided by banks.

The Investment Company Institute, the trade group for the fund industry, says that nearly $76 billion flowed into money market funds in December, while about $30 billion flowed out of stock funds and a mere $7.4 billion flowed into bond funds.

There are various reasons. Money market funds are a relatively safe place to park money ultimately destined for other investments, and year-end bonuses and investment sales for tax reasons cause a flood of cash in December.

Also, The Wall Street Journal reports that the Dec. 31 expiration of temporary FDIC protection for bank accounts over $250,000 eliminated a reason for big investors to favor banks over money market funds that are slightly more generous.

Chasing yield might pay for big investors, but not for small ones. Even if you could find a fund paying more than a money market account at a bank, the difference would hardly be worth thinking about. At 0.04%, you'd earn $4 a year for every $10,000. Even at five times that rate you'd get only $20.

For most small investors and savers, it's just fine to leave cash in the bank -- in savings accounts, money market accounts, checking accounts or certificates of deposit. In addition to the FDIC insurance, which you don't get at a brokerage or mutual fund company, bank savings are easy to get at. (Look here for details on FDIC coverage.)

That doesn't mean money market funds at brokerages and mutual fund companies have no purpose. They're very convenient if you want to move money in and out of other investments such as mutual funds.

But some of these money market funds come with a bit of extra risk aimed at increasing yields, a tradeoff that isn't worth bothering with. The Journal notes that these higher-yielding funds, while still paying well below 1%, are investing in securities such as foreign bonds that carry more risk than the short-term Treasury securities held by the safest money market funds and accounts.

Until interest rates rise, it's best to put desires for yield on the back burner and focus on the chief benefits if cash holdings -- safety and liquidity.