Protecting Investments: Safe Funds For Volatile Markets

Investing in a safe fund is a good option if you want to protect your capital. Safe investments are typically non-volatile and liquid, meaning they can be easily sold and turned into cash. They are also associated with low price volatility and a low chance of losing your principal investment. While these types of investments tend to have lower returns than riskier assets, they can be a good option if you want to minimise risk. Examples of safe investments include high-yield savings accounts, money market funds, treasury securities, and bond funds.

Money market funds vs money market accounts

Money market funds and money market accounts are both low-risk investment options, but they have some key differences.

Money market accounts are a type of federally insured liquid bank account, which means that they are protected by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA) network. They pay interest on your deposit, and the top-yielding money market accounts currently pay an annual percentage yield (APY) of over 5%, while the average bank is paying just 0.61% on savings accounts. Money market accounts often come with tools such as a debit card and check-writing abilities, but there are usually restrictions on the number of withdrawals you can make per billing statement period.

Money market funds, on the other hand, are not federally insured or regulated, but they are still considered a safe place to invest and grow your money. They are investment products that allow consumers to earn interest in a lower-risk environment than the stock market. Money market funds typically earn slightly higher interest than a money market or savings account, but investors don't have access to funds through debit cards or check-writing. Money market funds are issued in shares, and fund managers try to keep the price per share as close to $1 as possible.

When deciding between a money market account and a money market fund, it's important to consider your financial goals and risk tolerance. If you want a higher interest rate than a savings account but don't want to lock your money up in a longer-term commitment, a money market account could be a good option. Money market accounts are also a good choice if you prefer the ease of using a check or debit card to access your savings.

On the other hand, if you're interested in earning a slightly higher interest rate than a money market account and don't need everyday access to your savings, a money market fund could be a better fit. It's important to note that money market funds are not insured against loss, so there is a small chance of losing money.

Treasury securities

While Treasury securities are considered low-risk, they are vulnerable to inflation and changes in interest rates. The interest rates paid by T-bills and Notes are also typically low, as the minimal risk of these investments means their yields are fairly low.

Treasury Inflation-Protected Securities (TIPS) are a type of Treasury security designed to protect investors from inflation. The principal amount of TIPS rises or falls depending on the consumer price index, and interest is paid semi-annually at a fixed rate applied to the inflation-adjusted principal. At maturity, investors are paid the adjusted principal or the original principal, whichever is greater.

High-yield savings accounts

• High Interest Rates: High-yield savings accounts typically offer interest rates that are much higher than traditional savings accounts, often around 5% APY. This means your savings will grow faster over time.
• Federal Insurance: High-yield savings accounts at banks are federally insured by the FDIC (Federal Deposit Insurance Corporation), while those at credit unions are insured by the NCUA (National Credit Union Administration). This insurance covers deposits up to $250,000 per depositor, ensuring the safety of your funds.
• Accessibility: These accounts provide easy access to your funds, and you can usually withdraw your money at any time. However, some accounts may have monthly withdrawal limits, typically up to six transactions per month.
• Low Fees: Many high-yield savings accounts have low or no monthly maintenance fees, making them a cost-effective option for savers.
• Online Accessibility: Many high-yield savings accounts are offered by online banks or fintech companies, providing the convenience of managing your savings through digital platforms and mobile apps.

It's important to consider the features that are most important to you when choosing a high-yield savings account, such as interest rates, fees, withdrawal limits, and digital accessibility. Additionally, it's always a good idea to compare options from multiple banks and credit unions to find the best fit for your needs.

Certificates of deposit (CDs)

With CDs, you usually can't add or withdraw money after the account is opened. You also can't access your funds until the CD term ends. If you need to access your money, you'll get hit with an early withdrawal penalty fee and possibly lose out on accrued interest.

CDs are best for those looking for a guaranteed rate of return that's typically higher than a savings account. In exchange for a higher rate, funds are tied up for a set period, and early withdrawal penalties may apply.

CDs are one of the safest savings vehicles as your money is federally insured. They combine decent interest rates with a guaranteed return of your principal, and they benefit from FDIC insurance on balances up to $250,000.

CDs are best for short-term financial goals when the maturity date matches your time horizon—that is, when you believe you'll need your cash.

CDs are not considered very liquid assets. They offer a range of terms, from three months to ten years, but withdrawing the principal ahead of the maturity date often means paying early withdrawal penalty fees or forgoing interest payments.

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.

CDs are generally a good investment. Your money grows without the risk of your rate dropping, and you're guaranteed a return without worrying about stock market volatility.

However, CDs can be considered a bad investment when rates are low or if rates go up while you're in the middle of a CD term as they have fixed interest rates.

Mutual funds and exchange-traded funds (ETFs)

When considering whether to move your investments into a safe fund, one option to evaluate is mutual funds. Mutual funds can provide a level of diversification and professional management that can be beneficial for investors, especially those who may not have the time or expertise to actively manage their investments. By owning a mutual fund, you are pooling your money with other investors and hiring a manager to invest that money in a specific type of security or industry. This diversification can reduce the risk associated with individual stocks or bonds, providing a safer investment option.

Additionally, the active management of mutual funds means that the fund manager can adjust the fund's holdings to adapt to changing market conditions. This can be particularly advantageous during times of market volatility or economic uncertainty. However, it's important to remember that mutual funds are not immune to losses, and their performance will still be tied to the overall market and economic trends.

Exchange-traded funds (ETFs) offer a similar approach to diversification and professional management. ETFs are baskets of securities that trade on an exchange like a stock. They can track a particular index, sector, or industry, providing exposure to a diverse set of investments. ETFs are generally considered to have lower expenses than mutual funds, and they offer more flexibility since they can be traded throughout the day.

Like mutual funds, ETFs can provide a level of safety through diversification. However, it's important to carefully research and understand the specific ETF you are considering investing in. Some ETFs use complex investment strategies or focus on narrow market segments, which can introduce additional risks. Additionally, the trading costs associated with ETFs can vary depending on the broker and the frequency of trades, so it's important to factor those costs into your investment decision.

When deciding whether to move your investments into a safe fund, it's crucial to assess your risk tolerance, investment goals, and time horizon. Both mutual funds and ETFs offer a level of safety through diversification and professional management, but it's important to remember that all investments carry some degree of risk. Reviewing your investment portfolio regularly and making adjustments as needed based on your financial goals is always a prudent approach. Consulting with a financial advisor can also help you make informed decisions that align with your specific circumstances.

Frequently asked questions