Low-Risk Investment Vehicles: Safe And Secure Options

Low-risk investment vehicles are a great way to diversify your portfolio and protect your assets during market downturns. These investments are generally stable, liquid, and carry a lower chance of losing value, but also generate lower returns. Examples of low-risk investments include high-yield savings accounts, money market funds, certificates of deposit, short-term government bonds, and investment-grade corporate bonds. These options offer more predictability and security but limited growth potential, making them ideal for risk-averse individuals who want to grow their money faster than a traditional savings account.

High-yield savings accounts

One of the benefits of high-yield savings accounts is that you can withdraw your money at any time, providing liquidity and security. This makes them ideal for emergency funds or upcoming expenses. Many high-yield savings accounts also offer an ATM card, so you can access your money on the go.

These accounts are offered by online banks, which have lower overheads than traditional banks, allowing them to offer more attractive interest rates. Many online banks are digital-only institutions, so it's worth considering keeping some funds in a local bank if you anticipate needing quick access to your cash.

While high-yield savings accounts are a safe investment option, it's important to note that returns are still relatively low compared to other investment types. Some banks may also charge account fees, so it's important to do your research before opening an account.

Overall, high-yield savings accounts are a great option for those seeking a low-risk investment vehicle with higher interest rates than a regular savings account. They offer a good balance of safety, liquidity, and potential returns, making them a stable choice for investors.

Money market funds

There are three main types of money market funds:

• Government: Invest 99.5% or more of the fund's total assets in cash, US government securities, or repurchase agreements collateralised by government securities.
• Municipal: Invest primarily in municipal bonds, meaning the yield is typically exempt from federal income taxes.
• Prime: Invest in a variety of taxable short-term corporate and bank debt securities, as well as commercial paper and repos, among other securities.

Short-term certificates of deposit

CDs differ from high-yield savings accounts in that they are not as accessible. Traditional CDs lock up your money for a specified amount of time, but you get to pick the length of the term so you know what to expect. CD term lengths vary, typically ranging from three months to five years, and usually, the longer the term, the higher the fixed interest rate offered.

If you feel that you need greater access to your cash or don't want to commit to locking it up, you can opt for a no-penalty CD, which allows for easy withdrawals cost-free. You can also get add-on CDs that let you make additional contributions.

Banks like Ally Bank and Synchrony Bank offer no-penalty CDs. For example, Synchrony Bank offers no-penalty CDs with terms ranging from three months to five years and an annual percentage yield (APY) ranging from 0.25% to 4.25%.

With a CD, you make a one-time deposit when you open the account, and you typically can't contribute any more money beyond that. They are a good vehicle for short-term investments because, in a high-interest-rate environment, they allow you to lock in a good rate.

CDs can help you diversify your income and offer flexibility when you need it. They stand out for being highly liquid, stable, and relatively low risk, so you can count on your money being there when you need to withdraw it quickly at low (or no) cost.

Cash management accounts

CMAs function similarly to checking and savings accounts but with added benefits for investors. They often provide higher interest rates than traditional bank accounts, and the money in these accounts is typically swept into partner banks overnight, allowing for FDIC insurance beyond the standard $250,000 limit. This makes CMAs ideal for individuals looking to safely hold large sums of money.

Benefits of Cash Management Accounts

• Competitive interest rates: CMAs often offer higher interest rates than traditional bank accounts, allowing individuals to grow their savings faster.
• Low or no fees: Many CMAs have no monthly maintenance fees, and some even reimburse ATM fees.
• Investment options: CMAs often provide seamless access to investment accounts, making it easy to transfer money between savings and investments.
• FDIC insurance for larger sums: By partnering with multiple banks, CMAs can offer FDIC insurance beyond the standard $250,000 limit, providing added security for individuals with substantial savings.

Drawbacks of Cash Management Accounts

While CMAs offer numerous benefits, there are also a few potential drawbacks to consider:

• Online-only access: Many CMAs are offered by online-only institutions, so individuals who prefer in-person banking may find this inconvenient.
• Minimum balance requirements: Some CMAs require high minimum balances to qualify for certain features or to avoid monthly fees.
• Existing investment account requirements: Some institutions may require individuals to have an existing investment account before opening a CMA.

Examples of Cash Management Accounts

• Wealthfront Cash Account: This CMA offers a competitive interest rate, early paycheck access, fee-free ATMs, and a debit card. It also provides access to peer-to-peer payment apps and allows for automatic transfers to targeted savings accounts.
• Fidelity Cash Management Account: Fidelity's CMA offers fee-free access to a wide range of ATMs worldwide and reimburses any ATM fees charged by the provider. It provides unlimited check writing and has no monthly fees or minimum deposit requirements.
• Betterment Cash Reserve: This CMA offers a high variable APY on all balances and has no monthly maintenance fees or minimum balance requirements. It allows for automatic deposits towards specific savings goals.

Government bonds

There are several types of government bonds, including:

• Municipal bonds: Issued by local governments to fund infrastructure, libraries, or parks. They often carry tax advantages and exemptions for investors.
• US Savings Bonds: Offered by the US Treasury, these bonds have a fixed rate of interest and double in value if held for 20 years.
• Treasury Bills (T-Bills): Short-term securities with maturities of up to one year. They are sold at a discount or face value and mature at face value.
• Treasury Notes (T-Notes): Intermediate-term bonds with maturities of two, three, five, or ten years. They provide fixed coupon returns and typically have a face value of $1,000, except for two- or three-year maturities, which have a $5,000 face value.
• Treasury Bonds (T-Bonds): Long-term bonds with maturities of 20 to 30 years. They provide semi-annual interest or coupon payments and have a minimum investment of $100.
• Treasury Inflation-Protected Securities (TIPS): Indexed to inflation, TIPS protect investors from the adverse effects of rising prices. The par value adjusts with inflation or deflation, following the Consumer Price Index (CPI). They have maturities of five, ten, or 30 years and pay a fixed interest rate determined semi-annually at the bond's auction.

Frequently asked questions