When you want to earn interest on your money, you can place it in a bond mutual fund. These funds will put your money in government and corporate bonds that pay you interest. On the other hand, you can place your money in an online high-yield savings account. These accounts also pay interest. Choosing between bond funds and online savings accounts means coming to terms with how much risk you're willing to live with.
Bond Fund Advantages
Your investment in bonds funds has the opportunity to grow. This means that in addition to the interest you receive, the bonds themselves can go up in value. This happens when the bonds in your fund earn higher interest than banks pay. Investors will place a higher value on your bonds because they pay better. A savvy bond fund manager can sell the bonds for a profit and put the proceeds to work in new bonds. This gives you the double benefit of interest plus growth. In addition, your bond fund investment gets spread out among many agencies and companies. That way, if one bond gets in trouble, the others may do well and make up for it.
Bond Fund Drawbacks
Your bond fund can go down in value. If interest rates rise to the point that they are higher than what your bonds pay, investors will devalue your bonds. That will cause the price of your bond fund shares to go down. Also, corporate bonds are not insured. Any bond your fund holds that is issued by a corporation is subject to default. A corporation in trouble may not be able to pay the interest. This can cause your bond fund shares to go down in value and reduce your interest income.
Perks of High-Yield Savings Accounts
Online savings accounts compete with your local financial institution by offering higher interest rates. You can get a better return on your money if you shop online for the best rate. Online accounts compete based on customer service. They offer easy online transfer of funds and often provide immediate access to knowledgeable customer service representatives who can answer questions and help you resolve problems.
High-Yield Savings Account Disadvantages
Because online high-yield savings accounts do not invest in bonds, you don't have any opportunity for growth in terms of rising prices. You will only earn the interest. Also, issuers of bonds try to attract investors by offering better interest rates than you can get in a savings account. This means you may earn less interest than you could with bond funds. Your savings are fairly liquid -- meaning you can get your money whenever you want -- and this may tempt you to spend your money instead of letting it earn interest.
Before opening an online savings account, you should ensure that deposit accounts with the institution are protected by the Federal Deposit Insurance Corporation. Funds placed in an FDIC-insured account are protected against losses of up to $250,000.
- NerdWallet: Earn a High Yield on Your Savings
- LearnBonds: Why You Should Dump Your Savings Accounts for Savings Bonds
- The New York Times: Options for Savers Seeking Better Rates
- MoneySmartLife: FDIC Insured Banks–Are Online Savings Accounts FDIC Insured?
- Consumerism Commentary: The Best Online Savings Accounts
- Weakonimics: How Do Bond Mutual Funds Work?
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