High rate battle: Mutual Funds and CD's
Once you have saved some money, whether for long term savings or an emergency savings account, you may find yourself wondering about investment options. You want an option that protects your money and allows it to grow over time. In order to choose the right investments, you will have to weigh the benefit of greater gains against the risk this entails. For many people, the first investment step they take is to save in a money market account instead of a traditional savings account. A money market account allows easy access to your money on a routine basis with some limits. If you are ready to move on to other investment options, you may be considering a CD or mutual fund. What are the risks, benefits and differences between these choices?
A CD, or Certificate of Deposit, is a low risk investment option. This savings choice pays more in interest than a money market or traditional savings account. Do shop around for the best possible rates, as they can vary substantially. You can buy at your local bank, if their interest rates are competitive. You can purchase a Certificate of Deposit that matures quite quickly, in a month or so or one that will take several years to mature. There are early withdrawal penalties, so you should avoid this option if you will need to withdraw funds routinely. This may be ideal if you have some long term savings or enough emergency savings to allow a portion of it to be inaccessible for the term of the certificate.
Mutual funds offer much higher returns, while still mitigating the risks of independent investment in the stock market. A mutual fund is a diverse portfolio of stocks and bonds managed by a single financial advisor, buyer or broker. These funds are, on the whole, less susceptible to market trends. As with many easy savings and investment plans, once your money is invested, you can largely forget about it. Your portfolio will grow with no attention from you. A significant drop in the stock market can lead the Net Asset Value or NAV of a fund to drop. This is, however, a much higher risk investment choice than a money market account or CD and that should be considered if you cannot afford to lose any portion of your investment.
Which is right for your money? You have to consider your risk comfort level. If you are near retirement or still just beginning to accumulate assets, you may be uncomfortable with the risks involved in any sort of stock market investment. On the other hand, investing in the market is the best way to earn substantial gains and improve your long term financial outlook.