Low-Risk Investment Options: Tickers To Watch For Safe Returns

Low-risk investments are a great option for conservative investors who want to protect their money from potential losses while benefiting from modest growth. While low-risk investments can preserve your capital, they also limit your returns. These investments are ideal for risk-averse investors who prioritise capital preservation and stability over high returns.

- High-yield savings accounts

- Certificates of deposit (CDs)

- Money market funds

- U.S. Treasury securities

- Fixed annuities

- Investment-grade corporate bonds

- Dividend-paying stocks

US Treasury Securities

Treasury securities are often considered one of the world's lowest-risk investments due to the US government's historical strength in repayment. This low risk gives treasuries a unique place in the financial system, where they are used as cash equivalents by institutions, corporations, and wealthy investors.

There are four types of marketable treasury securities:

• Treasury Bills (T-bills): Zero-coupon bonds that mature in one year or less. They are bought at a discount and redeemed at face value.
• Treasury Notes (T-notes): Have maturities of 2 to 10 years and pay interest semi-annually.
• Treasury Bonds: Have maturities of more than 10 years, typically 20 to 30 years. They also pay interest semi-annually.
• Treasury Inflation-Protected Securities (TIPS): The principal amount of TIPS rises or falls depending on the consumer price index. They are issued with maturities of 5, 10, or 30 years.

Treasury securities are typically purchased at auctions held by the government or on the secondary market. They are issued in denominations of $1,000 and offer lower yields than other fixed-income securities due to their minimal risk. The interest income on treasury securities is subject to federal taxes but is exempt from state and local taxes.

While US Treasury Securities are considered low-risk, investors should be aware of potential risks such as interest rate risk, inflation risk, and credit or default risk. Treasury securities are susceptible to fluctuations in interest rates, and income produced by treasuries may be lower than the rate of inflation. Additionally, all bonds carry the risk of default, although the risk is minimal for treasuries due to the backing of the US government.

High-yield savings accounts

The interest rates offered by high-yield savings accounts can vary depending on market conditions. However, you will never lose the money you invest, and you will always earn at least a modest return.

To get a high-yield savings account, simply open an account with a bank that offers this option. Online banks tend to be able to offer more attractive rates than traditional brick-and-mortar banks because they have lower overhead expenses.

While high-yield savings accounts are a safe option for your money, there are some risks to consider. Returns are still quite low compared to other investments, and some banks may charge account fees. Additionally, there is a risk that inflation will erode the purchasing power of the money in your account over time.

Money market funds

Here's a more detailed look at money market funds as a low-risk investment option:

Benefits of Money Market Funds:

One of the main advantages of money market funds is their low-risk nature. They are designed to maintain a stable $1 net asset value (NAV) per share, and any excess earnings are distributed to investors as dividends. This makes them a relatively safe investment option, as the risk of losing money is very low. Money market funds also offer high liquidity, allowing investors easy access to their funds with the ability to withdraw their money at any time. Additionally, money market funds provide a modest income through dividends, which typically reflect short-term interest rates.

Types of Money Market Funds:

• Government Money Funds: These funds invest at least 99.5% of their total assets in cash, US government securities, or repurchase agreements backed by government securities. They are considered very low risk due to the stable nature of government-backed securities.
• Municipal Money Funds: These funds primarily invest in municipal bonds, which offer tax advantages as the yield is usually exempt from federal income taxes.
• Prime Money Funds: These funds invest in a variety of short-term corporate and bank debt securities, as well as commercial paper and repos. They may be issued by corporations, government agencies, and government-sponsored enterprises.

Risks and Considerations:

While money market funds are considered low-risk, it's important to note that they are not entirely risk-free. There have been rare instances where money market funds have dipped below the $1 NAV, resulting in losses for investors. Additionally, money market funds are not insured by the Federal Deposit Insurance Corporation (FDIC) like other bank deposits. It's also important to consider the impact of interest rate fluctuations on money market funds, as their returns are dependent on market interest rates.

How to Invest in Money Market Funds:

To invest in money market funds, individuals can purchase shares through a brokerage firm or a mutual fund company. It's important to evaluate different money market funds and consider factors such as the net expense ratio and the initial investment minimum before making a decision. Diversification is also crucial, as it helps to minimize risk and maximize the potential for stable returns.

Certificates of Deposit (CDs)

CDs are a good option for those who want a guaranteed rate of return that is typically higher than a savings account. The longer the term length and the greater the initial deposit, the higher the interest you'll earn. However, if you withdraw your money before the term is up, you'll incur an early withdrawal penalty.

CDs are best suited to those who don't need immediate access to their funds and are happy to leave their money untouched for the length of the term. This makes them a good option for those saving for medium to long-term financial goals, such as a house down payment.

When choosing a CD, it's important to consider the term length, minimum opening deposit, interest rate, and any early withdrawal penalties. It's also worth checking whether the bank or credit union offers any special types of CDs, such as bump-up CDs or no-penalty CDs.

• Bask Bank offers a competitive yield and terms ranging from 3 months to 2 years, with a minimum opening deposit of $1,000.
• Synchrony Bank offers a wide range of terms from 3 months to 5 years, with no minimum opening deposit.
• America First Credit Union offers highly competitive rates and terms ranging from 3 months to 5 years, with a low minimum opening deposit. They also offer specialty CDs such as bump-rate CDs and flexible CDs.

Fixed annuities

There are two stages in the life of a fixed annuity: the accumulation phase and the payout phase. During the accumulation phase, you make a series of payments into your annuity and earn interest that grows the value of your account tax-deferred. The payout phase can take the form of a single, lump-sum payment or a series of regular payments over time.

Another benefit of fixed annuities is that they offer reliable retirement income. They provide several income options: fixed period, specified amount, single life, and joint life. Choosing a lifetime income option can help protect against the risk of outliving your assets. Regardless of the option chosen, you will know upfront what your monthly payout will be.

Another disadvantage is that you will pay ordinary income tax on earnings. The earnings from your annuity are tax-deferred, but they are taxed as ordinary income when you make withdrawals. Finally, fixed annuities are not inflation-proof, and the inflation rate may be higher than the guaranteed rate your annuity contract pays.

Frequently asked questions