Money Market accounts are generally considered to be safe investments, but they are not, according to several experts, immune from danger. Here we will take a look at exactly what a money market account is and how the highest money market rates in years can be misleading people into an unwise investment and damaging financial stability.

What Is A Money Market Account?

A money market account is a collective account that offers investors a more profitable alternative to ordinary savings accounts and certificates of deposit. With a money market fund the investments of thousands of people, corporations and organizations are pooled together and invested in a wide range of financial products. They are often billed as “completely safe investments” with little risk, but lately some of these funds have been struggling. Surprisingly, many people who place their money in what they believe are the best money market funds are unaware that their money may indeed be at risk.

Highest Money Market Rates: The Dangers

As money market rates climb, it can be great for investors, but with the recent credit crunch many banks have had a tendency to go back and re-examine some of their loans and have been very careful about lending money to each other. In certain cases, the prices of these loans have dropped sharply and this trend has been hardest felt by investors. The problem with some money market mutual funds, in which a lot of debt is bundled together, is that it just takes one or two loans to go south to disrupt the fluidity of the entire fund.

Rising rates could cause more problems as well. First, a major influx of money into money market funds, as investors position themselves to capture the best money market interest rates, could force those same investors out of stocks and equities. And when the rate goes down again, those same investors will pull their money out. This type of flux can cause turmoil to both the market and to individual investors. Second, rising rates could prompt major investors and corporations into more short-term instruments and out of money market mutual funds for the time being, as these instruments will be able to take advantage of the rate hike sooner. This will cause disruption in the money market and, again, spells bad news for the little guy who was simply looking for a safe, long-term investment.

News of the highest money market rates in years may sound like sweet music to your ears, but before you commit to a long-term investment it’s wise to first know all the facts and approach these funds with extreme caution.