Market Volatility: Is Now The Time To Invest?

Investing in funds can be a great way to grow your money, but it's important to consider your risk tolerance, timeline and other factors. Here are some of the best funds to invest in right now:

- High-yield savings accounts: These accounts provide higher rates of return than a traditional bank savings account. They're best for short-term savings or money you need to access only occasionally.

- Certificates of deposit (CDs): CDs are federally insured savings accounts that offer a fixed interest rate for a defined period of time. They're a good option for money you know you'll need at a fixed date in the future.

- Bonds: Lower-risk bonds, such as government or corporate bonds, tend to pay lower interest than higher-risk bonds. Government bonds are virtually risk-free, while corporate bonds offer potentially higher yields but are not backed by the government.

- Money market mutual funds: Money market funds are an investment product that buys a collection of high-quality, short-term government, bank or corporate debt. They're best for money you may need soon that you’re willing to expose to a little more market risk.

- Mutual funds: Mutual funds pool cash from investors to buy stocks, bonds or other assets. They're a convenient way to get exposure to the stock market and are best for people saving for retirement or another long-term goal.

- Index funds: Index funds are a type of mutual fund that holds the stocks in a particular market index, such as the S&P 500. They're more cost-effective than actively managed funds and less volatile, making them a good option for young investors.

- Exchange-traded funds (ETFs): ETFs are like mutual funds but are bought and sold like stocks on an exchange. They're ideal for investors who don't have enough money to meet the minimum investment requirements for a mutual fund.

- Stocks: Stocks generally offer a larger potential return on your investment than lower-risk options, but they also expose your money to higher levels of volatility.

- Dividend stocks: Dividend stocks can provide the fixed income of bonds as well as the growth of individual stocks and stock funds. They're a good option for any investor, from first-timer to retiree.

High-yield savings accounts

One of the benefits of HYSAs is that they allow your money to grow faster. Your APY can fluctuate over time, in accordance with the Federal Reserve changing its benchmark interest rate, but the more frequently your interest compounds (daily or monthly), the greater your return. Additionally, online banks can often offer higher APYs because they don't have the overhead costs of brick-and-mortar buildings. However, they may also come with deposit and balance minimums, monthly fees, or other limitations.

When choosing a high-yield savings account, it's important to consider the interest rate, deposit requirements, and account fees. Some accounts may require a minimum opening deposit, which can range from $0 to over $100. There may also be maintenance fees, overdraft fees, and ATM fees associated with the account. It's also worth noting that HYSAs typically have withdrawal/transfer limits, and not all of them offer ATM access.

Overall, high-yield savings accounts can be a great way to boost your savings and earn a higher interest rate than with a traditional savings account. By shopping around and comparing interest rates, fees, and other features, you can find an account that fits your needs and helps you achieve your financial goals.

Certificates of deposit (CDs)

CDs tend to have higher rates than regular savings accounts but don't allow access to your money until the term ends. They are federally insured, so your money is protected, which makes them one of the safest savings vehicles.

When choosing a CD, first focus on how long you want to keep your money locked up. Pick a CD based on that length of time and the rate will follow. For example, if you want to save up for a down payment on a home in a few years, consider a longer-term CD like a three- or five-year option and then look at what banks offer rate-wise for those specific CD terms. Shorter CD terms, such as three to six-month CDs, are a good choice for beginners who want to save (and grow) their money for a short-term goal, such as a vacation.

When comparing CDs, make sure you're comparing the same term, like a one-year CD to another one-year CD at a different bank. With CDs, the interest rate is important, as well as considering what the minimum deposit is and any early withdrawal penalties and fees.

The Fed dropped its benchmark rate on 18 September 2024, and as a result, banks and credit unions have started lowering CD rates. With a CD, you can lock in high rates while they're still around.

Bonds

However, 2022 was a challenging year for both bonds and equities, which left many investors questioning the traditional 60/40 split and challenging how their portfolios are weighted.

Interest rates have remained higher for longer than anyone expected, largely because inflation is not decreasing as quickly as hoped. This has resulted in many investors sitting on losses, waiting for a recovery and bounce back in prices.

Despite this, it is thought that now is a good time to invest in bonds. This is because interest rates are now pushed to a level where you can lock in quite an attractive yield or income from your bonds. If interest rates do start to come down, and bond yields follow, there is the potential for capital gain. As interest rates come down, the price of bonds will go up, so you're locking in a good income and you've got the potential for capital gain.

There are two main types of bonds: corporate bonds and government bonds (called gilts in the UK). Government bonds are the part of the fixed-income universe that is most sensitive to movements in interest rates. The chance of rates falling from their current level is greater than the possibility that they will rise much further.

Corporate bonds are also influenced by the health of the economy and its impact on companies. As the economy slows, more companies may fall into difficulty and become unable to meet their obligations to lenders. This is likely to become a bigger problem as more companies are forced to refinance their debts at much higher rates.

For this reason, investors who are seeking the extra income that corporate bonds offer compared with government bonds should err on the side of caution and only invest in the highest-quality companies' debts. So-called high-yield bonds might look attractive based on the income they offer, but the risks of failure are commensurately higher.

Money market funds

Advantages of Money Market Funds

• Low Risk and Short Duration: Money market funds are considered less risky than stocks and bonds due to their focus on low-risk, short-term investments. This makes them a stable and secure investment option.
• Diversification: Money market funds offer instant diversification across a range of securities, providing a safeguard for an investor's portfolio.
• Stability and Security: Money market funds are among the least volatile types of investments, helping to offset the volatility of stocks and bonds in an investor's portfolio.
• Potential Tax Efficiency: Investments in certain types of money market funds, such as municipal money market funds, may offer tax advantages.

Disadvantages of Money Market Funds

• Low Returns: Money market funds typically generate low single-digit returns, which may not keep up with inflation and may result in a loss of purchasing power.
• Expenses: The fees associated with money market funds can eat into the already low returns, making it challenging to keep pace with inflation.
• Lack of FDIC Insurance: Unlike bank accounts, money market funds are not insured by the Federal Deposit Insurance Corporation (FDIC). However, they are covered by the Securities Investor Protection Corporation (SIPC), which provides some financial protection for investors.

Mutual funds

Investing in mutual funds can be a powerful tool for wealth creation, especially in a country with a growing economy and a burgeoning middle class. The simple answer to the question of when to start investing in mutual funds is: the sooner, the better.

• Compounding Benefits: Compounding refers to earning returns not just on your initial investment but also on the returns generated over time. The longer your money remains invested, the greater the compounding effect. Starting early allows more time for your money to grow exponentially, leading to substantial wealth accumulation in the long run.
• Mitigating Market Fluctuations: By investing early and staying invested for a longer duration, you can ride out market volatility and benefit from rupee cost averaging. This means buying more units when prices are low and fewer units when prices are high. This strategy can lead to a more balanced and stable investment journey, reducing the risk of short-term losses impacting your overall returns.
• Diversification: Mutual funds provide a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers who make investment decisions on your behalf. This diversification reduces the risk of losses due to poor performance in one area.
• Regulation and Transparency: Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), adding a layer of safety through mandatory guidelines and safeguarding policies. Mutual funds are also obligated to disclose their portfolio holdings and performance regularly, ensuring transparency.
• Cost-Effectiveness: Mutual funds have low investment and management fees, making them a cost-effective option for investors.
• Liquidity: Mutual funds offer high liquidity, which means that investors can easily buy and sell units without any inconvenience.

However, there are also some considerations to keep in mind:

• Management Fees: Mutual funds with high management fees may not be a good option, as they can eat into your returns. Look out for high annual expense ratios, high load charges, or high fees when buying or selling shares.
• Lack of Control: Mutual funds may not suit investors who want complete control over their portfolios, as the fund managers make the investment decisions.
• Returns Dilution: Due to regulations, mutual funds cannot have concentrated holdings exceeding 25% of their portfolio, which may lead to diluted returns.

In conclusion, mutual funds can be a great investment option, especially for those seeking professional help in managing their funds across different sectors or asset classes. Remember, consistent investing over time, coupled with a diversified portfolio, can help you achieve your financial goals. Don't delay; start your investment journey today!

Frequently asked questions