Best Low-Risk Options for Return on Investment
Markets can go from great to volatile quickly. During your journey to building wealth, you will want to balance your investments so that your potential gains are outweighed by your involved risks. The cash you have invested may bounce around a bit or not manifest soon enough in these types of situations.
Luckily, you have many options when choosing the best investments for returns. There are lower-risk choices, such as CDs or a money market account, as well as medium-risk investments like corporate bonds. There are also riskier options, such as stock index funds. What’s good about this is that you can invest in the returns that best fit your risk profile.
Combining investments is one way that you can create a diversified, and well-rounded, portfolio. The content below will help explain your options for the best investment returns.
The Top Investment Returns in 2020:
- A high-yield savings account
- Certificates of deposit
- Money market accounts
- Treasury securities
- Government Bond Funds
1. High-Yield Savings Account
Your traditional savings accounts earn you mere pennies per day. A high-yield savings account is one option for a better return on investment. Benefit from lower overhead costs while still earning higher interest rates than with a traditional, or even an online, bank. May 2020 rates for a high-yield savings account were paying, and sometimes passing, 1.5%. If you might need access to cash in hand in the near future, this may be your best bet.
- High-yield savings accounts are FDIC-insured, meaning your deposit is guaranteed.
- Even though they are a safe investment, you run a risk of inflation, causing you to earn less upon reinvestment.
- Federal regulations keep limits set at six withdrawals per month.
- Savings accounts provide a great amount of liquidity.
- You’re able to add or remove funds from your savings account at any time.
2. Certificates of Deposit
CDs, or certificates of deposit, generally offer an even higher interest rate than a high-yield savings account. These are issued by banks, which means they are federally insured. They usually offer specific maturity dates ranging from weeks to years away. You cannot withdraw the money without penalty for a specified time period.
Financial institutions pay the interest rate of CDs out at regular intervals. After it matures, the original principal is paid back plus accrued interest. As of May 2020, an annual percentage rate of 1.8% may be earned on these specific investments.
Since CDs generally offer higher payouts and a sense of safety, they can be one of the best money returns for those who are able to invest their money and keep it tied up for a while. Certificates of deposit come in many types, offering investors the ability to take advantage of higher interest rates.
- While CDs tend to be considered safe investments, they carry investment risks such as:
- Falling interest rates, which means investors will be earning less when reinvesting principal and interest in a CD with a lower rate.
- Rates can rise after an investor has locked their money into a CD.
- Laddering CDs (investing your money in CDs with varying terms) allow you to invest in more than one tool for a long period of time.
- Taxes and inflation can erode your investment purchasing power.
- CDs carry less liquidity than a savings account or money market account.
- Your money is tied up until your CD reaches maturity, which can be years.
- If you access your money before the maturity date, a penalty is often charged.
3. Money Market Accounts
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A money market account is an interest-bearing deposit account that is FDIC-insured. They generally earn higher interest rates than a savings account but require a higher minimum balance. They earn higher yields and are fairly liquid, resulting in being one of the best ROI investments. Some investors even use them as emergency savings.
Consumers usually will face more restrictions on their withdrawals in exchange for better interest earnings. Limits can include things such as limiting how often you’re able to access your money. Beginning investors find money market accounts to be an investment with the best returns and use them to build a cash flow.
- Your main threat with money market accounts is inflation.
- Purchasing power may be diminished if inflation rates exceed your interest rate.
- Though rare, if your money market account isn’t FDIC-insured, you could lose all, or some, of your principal.
- You can also lose your principal if your account exceeds the FDIC-insured maximum of $250,000.
- A money market account is considered fairly liquid.
- You have the option to write checks from most money market accounts.
- Withdrawals are limited to six per statement cycle.
- No more than three of your withdrawals are allowed to be in check form.
4. Treasury Securities
There are various types of U.S. government-issued securities in order to raise some of the funds used to pay debts and fund projects. In terms of protecting your principal, treasury security is one of the safest investments. Treasury bills, also known as T-bills, mature in one year or less. While not technically interest-bearing, they are sold for less than face value. After maturity, you get paid the full face value. For example, let’s say you purchase a $2,000 T-bill for only $1,850. When it matures, you will have earned $150.
Known as one of the investments with the best returns, you can purchase a T-note in two-, three-, five-, seven-, and even 10-year forms. The investor earns a fixed interest rate every six months and then the face value once the T-note matures. Your T-note can be greater than, equal to, or less than the face value of the note, depending on what the demand is at the time. If there’s a great demand by investors, your note will trade at a premium rate.
With 20- to 30-year maturity dates, treasury bonds also pay interest every six months and then at face value upon maturity. T-notes are sold at auction at different times throughout the year, with prices and yields determined at the time of auction.
Each type of security bond is offered in $100 increments and is another of the investments with the best returns for investors who are looking to reduce risk.
- Treasury security is generally considered risk-free since they are backed by the government.
- You get your interest and principal back when your T-note matures.
- The value of your security will fluctuate depending on interest rates.
- Existing bonds lose allure during a rising rate environment since investors can purchase a newly issued bond with a higher return.
- You may experience a capital loss if you attempt to sell your bond before its maturity.
- Treasuries are subject to the pressures of inflation. If your interest rate is less than the inflation rate, you lose purchasing power.
- A T-bill may be a safer investment since they have less risk than long-term T-notes or T-bonds.
- Be sure to remember you get your best investment return the longer your investment is.
- Treasury securities are highly liquid, but selling prior to maturity opens you up to losses and gains depending on current interest rates.
- T-notes and T-bills are automatically redeemed when they reach maturity.
- When a T-bond matures, it can be redeemed with the U.S. Treasury directly, if that’s where the bond is held, or with a separate financial institution.
5. Government Bond Funds
Another of the best investment return options is a government bond fund. These mutual funds are invested in debt securities that are issued by the federal government and its agencies. Funds are invested into debt instruments such as treasury bonds, notes, and bills as well as mortgage-backed securities that are issued by government enterprises such as Freddie Mac and Fannie Mae. These types of government bond funds offer the best rate on return investment for low-risk investors. They can also be a great choice for beginners who are wondering which form of cash flow has the best return on investment.
- Funds that are invested into government instruments are considered safe since they are backed by the faith and credit of our U.S. government.
- The funds themselves are not government-backed. This means that they are still subject to inflation and interest rate fluctuation.
- If inflation rises, an investor’s purchasing power may decline.
- If interest rates do rise, the price of existing bonds may drop, and if they decline, the price of existing bonds may rise.
- Government bond funds may be highly liquid, but they have values that fluctuate depending on current interest rates.
T his information can be a great resource when figuring out which options offer the best returns on investment. Building your wealth isn’t a quick process but knowing risks offer higher returns will make it worth it. You need to determine when it’s safer to invest in a low-risk investment with a lower return or take the leap. With the right knowledge, you will be able to manage your own assets.