Money market certificate or certificate of deposit?

A very common question among the investors today is what is the difference between a certificate of deposit and money market certificate issued by their credit unions. Money market certificates are nothing but a term investment offered by your credit union having a final maturity of less than one year. In that sense the money market certificates are similar to certificate of deposits having maturity of one year or less.

Credit unions are financial institutions like banks but they are owned by depositors instead of stock holders. Therefore, what is called as deposits at the banks are known as shares in credit unions? These shares earn interest similar to deposits in banks. The bank investments are insured by FDIC and in the similar manner all shares in credit union are insured by the National Credit Union Share Insurance Fund, or NCUSIF which has full recognition from the United States government.

Now coming to difference between a money market instrument and a certificate of deposit. A money market instrument is an instrument which has a maturity period of one year or less while a certificate of deposit can have any maturity period.

Certificate of deposits are debt instruments in banks having a fixed interest rate and maturity period. Therefore once you get a certificate of deposit you know exactly what amount you are going to receive from the bank at the end of maturity period. Usually the interest rates is higher for higher maturity periods. The maturity period range is anywhere between a few weeks to several years. Since this is supposed to be a fixed deposit, any premature withdrawal from this certificate of deposit will incur penalties from the interest amount. Therefore it is important to be sure that you won’t need to touch that money until the maturity period is over.

On the other hand money market instruments are more flexible. The combines the advantages of certificate of deposits and savings or checking account. A money market fund is similar to any other mutual fund except the this fund invests in low risk investments like government t-bills, savings bonds, CDs, and other financial instruments that are all conservative in nature. Most money market funds even issue a check book which can be used to withdraw money from this account. Advantage of such kind of account is that the liquidity. You can use is like any other savings or checking account. The disadvantage of money market account is that the interest rate varies and you don’t know that amount you will receive after a particular timeframe.

Whether you want to get a certificate of deposit or a money market certificate depends on your need and financial situation. It is always a good idea to research on internet or talk to a financial consultant in case you are not sure before buying a money market certificate.