You’ve been sticking to your budget and you’re finally starting to see the results in your savings. Now you just need to figure out what to do with all that cash. You could play it safe and leave it in an interest bearing savings account or you can take the plunge and invest it in mutual funds.
In order to decide whether a savings account or mutual funds are best for your financial needs, you need to understand how they work. You’re probably already familiar with a savings account and you hopefully already have one. There are different types of savings accounts available at various banks and you are usually eligible for higher interest rates by maintaining a high minimum balance. Mutual funds, on the other hand, are a type of investment. With a mutual fund, an investment firm will pool your money with other investors’ and then invest the money in stocks, bonds and other securities. Each investor owns a certain number of shares in the mutual fund, which are redeemable at any time.
You’ll probably sleep a little easier knowing your hard-earned cash is safely stowed away in a savings account. There is no real risk involved with a savings account because you aren’t investing it in high-risk securities as with a mutual fund. Stocks, bonds and other securities are unpredictable and while mutual funds may be a riskier option you can simply refrain from cashing in your shares when rates are low. You may also consider a money market fund, a low-risk version of a mutual fund. Money market funds invest in low-risk securities such as treasury notes and other government securities.
Even high-interest bearing savings accounts, which are typically accompanied by strict qualifications including minimum balances and withdrawal fees, don’t offer the earning potential of a mutual fund. Savings accounts usually include monthly maintenance fees, which can also cut into the low interest return. When it comes to investing, risk and reward go hand in hand. Stocks and bonds have the potential to produce greater returns, so while there are some fees associated with mutual funds, the returns are usually much higher than what you can expect from a savings account.
A savings account is established through and maintained at a banking institution, so much like your checking account, it is insured by the Federal Deposit Insurance Corporation (FDIC). A mutual fund, on the other hand, is set up and maintained through an investment firm and is not covered by the FDIC.
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