Money Market Mutual Funds
Dont confuse a money market mutual fund with a money market account. While theyre named similarly, they have different risks, though both are good short-term investments. A money market mutual fund invests in short-term securities, including Treasurys, municipal and corporate debt, as well as bank debt securities. And since its a mutual fund, youll pay an expense ratio to the fund company from the assets being managed.
Risk: While its investments are generally safe, money market funds are not as safe as money market accounts, which are FDIC-backed. In contrast, money market funds can lose money, typically only in periods of severe market distress, but they are generally quite safe. Still, they are some of the most conservative investments available and should protect your money.
Liquidity: Money market mutual funds are reasonably liquid, and you can access your money readily. They may allow you to write checks off the fund, though youre typically limited to six withdrawals per month.
Different Types Of Bonds
Bonds can be categorized on many aspects including tenure, creditworthiness, and the issuer. Based on tenure, bonds can be short-term, medium-term, and long-term. The yields on long-term bonds are mostly higher than short-term bonds due to the higher risk that investors are taking.
Bonds can be categorized as junk bonds and investment-grade bonds based on their credit rating. The yields on junk bonds are higher than that on investment-grade bonds to compensate investors for the higher risk that they take.
Bonds can also be categorized based on the issuer. There are bonds issued by federal governments, municipalities, private companies, foreign governments, as well as foreign companies. All of the bonds have different risk-return tradeoffs that reflect in their yields.
How Taxes Apply To Investments
You may need to pay taxes on the money you make from your investments. There are different tax rules for different types of investments.
Unless your investments are very simple, seek professional advice on tax planning.
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Costs When You Sell An Investment
The cost of selling an investment depends on the type of investment. With some mutual funds, instead of paying a fee, or front-end load fee when you buy, you pay a fee when you sell. This is known as a back-end load fee.
The back-end load fee:
- is generally a percentage of your selling price
- is normally highest in the first year after purchase
- gradually decreases for every year you hold the investment
- may be waived by the fund dealer if you hold the investment long enough
Think carefully before buying funds with back-end load fees. The fees are charged when you sell the funds and are based on a percentage of the selling price. You may be charged fees as high as 7% if you sell in the first year. To avoid this cost, you may have to hold the investment for several years.
What You Should Know About Short
Gordon Scott has been an active investor and technical analyst of securities, futures, forex, and penny stocks for 20+ years. He is a member of the Investopedia Financial Review Board and the co-author of Investing to Win. Gordon is a Chartered Market Technician . He is also a member of CMT Association.
While bond funds are often lumped together as a monolithic group in investment literature, there are in fact a wide variety of funds that can help investors meet a broad range of objectives. One of the most important goals of many bond-fund shareholders is the safety of their principal.
If you count yourself among those who need to prioritize capital preservation, short-term bond funds may be right for you. Keep in mind, however, that these funds are unlikely to offer much in the way of yield.
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What Makes A Short
When it comes to short-term investments for a diversified portfolio, its important to remember the products you choose should be based upon your overall goals, both for your money in the short term and the diversification of your portfolio overall.
In other words, this is anything but a one-size-fits-all proposition.
Generally speaking, if youre looking to invest money for the short term, youre probably trying to find the safest place to put some money to work before you need to use it in the not-so-distant future. In other words, along with potential gains, youre looking to have ready access to the cash invested when the need arises.
The best way to approach this is to think in terms of time increments. What will you need to do in three months and how much money will you need to do it?
The best short-term investment for you in each instance will be the one that offers the most significant gain, over a prescribed time period, at minimal risk. The options listed above can help you achieve those goals, while keeping your cash as liquid as possible.
Municipal Bonds Vs Government Bonds
The international bond market is an attractive low-risk investment for long-term investors. In this case, the investor purchases treasury notes and earns interest on the money they loan to the government. Government bonds are popular as a safe-haven asset, among institutions, and they flock to them to avoid volatility in the stock markets and other risky investments.
However, the interest investors earn on government bonds is subject to capital gains tax. Therefore, they may not suit short-term investors that dont want to share a portion of their investment gains with the government.
Government bonds also have a relatively low yield, as they are attached to the Federal Funds Rate, which is currently a paltry 2.5-percent.
The Federal Reserve is set to reverse its current course of monetary policy, from a tightening phase to an easing environment where they cut rates. Therefore, you can expect yields on government bonds to decline over the next policy cycle, which could last 4-years or longer.
If you hold government bonds during this period, and the Fed cuts rates to zero, or negative territory, you could end up paying the government to loan them money and thats not an ideal investment strategy.
However, municipal bonds, or munis, are an attractive alternative to government bonds, and they carry a much higher interest rate.
These bonds are free of any capital gains taxes, and you get to keep all of the money you make on the investment.
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Buying And Selling Treasury Bonds
A Treasury note is sold by the Treasury Department via an online auction. Once the note has been purchased by an investor, there are two options. The investor can hold the bond until maturity, in which case the initial amount invested would be paid back when the bond matures. If the investor holds the bond to maturity, the amount that was invested is guaranteed to be paid back by the U.S. government.
The investor also has the option of selling the bond before it matures. The bond would be sold through a broker in the secondary marketcalled the bond market. However, investors should be aware that their initial investment is not guaranteed if the bond is sold early through the bond market. In other words, they may receive a lower amount than what they had initially invested.
Where Can You Get Personal Retirement Advice
Many financial institutions, such as brokerages and banks, have financial advisors with whom customers can consult about retirement planning. These services may or may not come with a fee, depending on the institution. You can also visit your employer’s HR department to discuss retirement benefits offered through your job. Third-party financial advisors operate businesses focused solely on advice, but unlike some other options, these advisors will almost certainly charge a fee.
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As Good As Saving Pay Off Your Debt
Do you own credit cards, student loans, auto loans, or a mortgage? If so, then paying off your debt should be your top investment priority before you think about putting your money into the markets.
Some personal loans may have an APR of between 14 and 18-percent, with credit cards costing you anywhere between 18 and 24-percent, depending on your credit score.
Reducing your exposure to this type of high-interest debt is as good as saving. If youre paying an 18-percent APR on your credit card, and want to invest into an asset yielding 5-percent or less, you could be putting the money into paying off your debt, rather than making a low return that isnt even contributing to the interest on your outstanding debt.
Best Investments For Short
|When you need the money||Investment options|
|Bank products and Treasurys are safest, corporate bond funds slightly less so.|
|Three to five years||CDs, bonds and bond funds, and even stocks for longer periods||1.25+ percent||CDs and bonds are relatively low risk compared to stocks, which can fluctuate a lot and are high risk.|
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Why Would Investing In Bonds Be A Bad Idea
Whether a bond investment is bad or good depends on the investor’s financial goal and market conditions. If an investor wants a steady income stream, a Treasury bond might be a good choice. However, if interest rates are rising, purchasing a bond may not be a good choice since the fixed rate of interest might underperform the market in the future. Please remember, when you purchase a Treasury bond, the fixed rate of interest for that bond never changes, regardless of where market interest rates are trading.
Also, investing in bonds and selling them in the secondary market before their maturity can lead to a loss similar to other investments such as equities. As a result, investors should be aware of the risk that they could lose money by purchasing and selling bonds before their maturities. If an investor needs the money in the next year or two, a Treasury bond, with its longer maturity date, might not be a good investment.
Buying Bond Mutual Funds
Bond mutual funds offer investors many of the benefits of individual bonds, with decreased risk. Plus, buying mutual funds is a much simpler process.
Some of the key features of bond mutual funds are the benefit of diversification and professional management, says Powers. With a bond mutual fund, investors get the benefit of fixed income professionals managing the money and being in a pooled fund where theyre not holding just ten individual bonds. Theyre holding hundreds of bonds where the likelihood of one bond disproportionately impacting your results is much lower.
Like a stock mutual fund, bond mutual funds let you pool money with other investors to buy shares of a portfolio of bonds. Bond mutual funds may be actively or passively managed, funds typically follow a particular type of bondcorporate or municipal. They tend to pursue a set maturity strategy, long term or short term.
Some of the benefits of bond mutual funds include:
Bond mutual funds will come with management fees to compensate the fund managers for actively managing the bonds bought and sold within the fund. This fee is expressed as an expense ratio and indicates the fees youll incur based on your investment each year. For example, a bond fund with an expense ratio of 1% will charge you $10 per year on your $1,000 investment.
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Are Treasury Bills A Good Investment
As with all things, whether or not investing in T-bills is a good thing depends on your goals and risk appetite. What makes T-bills unique are their safety and ability to appreciate in times of crisis.
But if you are interested in generating income out of your portfolio you should probably look elsewhere. As we mentioned, you are not paid interest while holding T-bills, unlike with most bonds. Instead, you are paid the interest at the end of the term. Secondly, as per the U.S. Treasury website, the highest interest rate on a T-bill is around 0.10%. Either way you slice it, you are not going to be living in retirement off of Treasury bills.
However, for the longer-term T-notes and T-bonds, interest is paid every six months. But again, these pay rather low-interest rates . And these tie up your money for a very long time. Who knows what interest rates will do in the future?
One thing you can depend on is safety. As mentioned before, U.S. Government bonds are the benchmark for safety in the bond world, and the Treasury bill is its crown jewel. This is a major reason international investors also buy T-bills.
How Do I Invest In Short
Make a purchase. If you wish to acquire short-term government securities, go to TreasuryDirect.gov and buy them straight from the government. Your investment broker can help you buy short-term government bonds, as well as municipal and corporate bonds. Youll need to open an account if you dont already have one, which will need you to fill out a new account application. Personal information such as your name, address, and Social Security number will be required. To cover the cost of your order, youll also need to provide a minimum deposit.
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Treasury Bond Risks To Consider
In a way, this generation of Treasury investors is the luckiest in history. Since 1981, American interest rates have been on a steady but constant march down, to the present day where they are practically zero. This has been terrific for long-time buyers of Treasuries, as over the long term the value of the bills rose as interest rates fell. However, this raises the question: Where can interest rates go from here?
We have seen negative interest rates in other countries. But for now, there is a higher probability that long term we will see interest rates rise. In a rising interest rate environment, long-term Treasury investors would be fighting an uphill battle as their bond values continually decline.
Speaking of values declining, investors in T-bills should also keep an eye on inflation. While inflation hasn’t been on anyone’s radar for over a decade, due to such low yields presently, even a moderate amount of inflation would cause investors to lose money on T-bills.
This being said, bonds and Treasury bills still have a place in a portfolio even if some of their benefits erode over time. What is most important is the safety and liquidity T-bills provide, and that investors be aware of possible future risks.
Costs To Manage The Fund
Investment funds, including mutual funds, charge a fee for managing the fund. The fees are called the management expense ratio .
- may include an ongoing commission paid to advisors who sell the fund
- is paid regardless of whether the fund makes money
- is deducted before calculating the investors return
- is set at a percentage of the funds value
The percentage varies depending on the fund. This can be from less than 1% to over 3%. For example, you may have a fund with an annual return of 5%. If the funds MER was 3%, your net annual return would be 2%.
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How Much Interest Can You Earn From A Treasury Bill
Interest rates on T-bills range from 0.04 percent to 0.17 percent, with maturities ranging from 4 to 52 weeks. The difference between the securitys purchase price and the amount you get at maturity is used to calculate your interest.
For example, a 52 week, $100,000 T-bill with a 1.5% discount would cost $98,500 and will make 1.5% in interest.
How Can I Be Sure Im Purchasing A Safe Bond
As with any investment, buying bonds carries risk. However, you can research the quality of the short-term bonds youre interested in purchasing before making a decision.
Bonds have ratings, or grades that indicate their quality, to help investors determine whether each bond is a wise investment. Various rating agencies such as Moodys, Standard and Poors, Fitch Ratings and DBRS assign ratings to a firms bonds. Those ratings are based on the bond issuers financial strength, growth potential and ability to repay its obligations.
U.S. government bonds are backed by the faith and credit of the U.S. government, so they offer the most security and least riskbut they typically pay interest rates that are lower than other short-term bonds. For instance, corporate bonds typically pay the highest interest rates, but the interest is fully taxable. Interest on short-term municipal bonds is exempt from federal income taxes, but the interest rate is usually lower than that of corporate bonds.
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Video On Your Low Risk Portfolio Allocation
Heres a video that recaps some the things Ive discussed in this article. You will also find other relevant videos on my channel.
Lars Kroijers bookInvesting Demystifiedis available from Amazon. He is donating any to medical research. He also wrote Confessions of a Hedge Fund Manager.
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