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Money Market Funds and Certificates of Deposit

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Money Market Funds and Certificates of Deposit

Money market funds

Many people park money they’ll need soon in a money market account. And for good reason: Money market funds are pretty secure.

Things To Know

  • People park money they’ll need soon in a money market account.
  • The biggest benefit of CD is that their returns are predictable.

But investors may do better by taking on a bit more risk. The average ultrashort-bond fund returns a little more annually versus the average taxable money market fund. That may not seem like a lot, but compounded over a few years, it could mean the difference between flying first class to Europe and being confined to coach.

Certificates of deposit

Certificates of deposit (CDs) are often popular with investors because, like bank accounts, they’re insured. Bonds and bank-loan funds generally are not.

Don’t get too bogged down in the insurance issue, though. The types of boring bonds used in short-term investing rarely go belly up. For that to happen, the U.S. government and a host of blue chip corporations would have to become insolvent. And if that happens, short-term investments may be the least of your worries.

The biggest benefit, however, is that a CD’s return is predictable. It’s guaranteed. Bond funds aren’t that predictable. (A bond fund is less predictable because its return is composed of both income and changes in the prices of the bonds it owns.)

Timing is the biggest problem with CDs. A CD requires that you hold it for a set period. If you cash in sooner, be prepared for substantial early-withdrawal penalties. The penalties typically range from three to six months’ worth of interest. But CDs can be great choices for investors who know exactly when they’ll need their money.