Which is better: CD or mutual fund?

Question

You can deposit $1,000 into a mutual fund that pays 6.5% monthly yield that you already have, but you can buy a 12 month CD for 5.5% at maturity - which one is a better deal?

Thanks, I've been in FAGIX for quite some time and the price stays the same but the monthly yield is great 6.5% currently. I figured it was better than a CD but wanted to find out if you had pros and cons. My goal is long term.

Answer 1

The part you leave out is what this Mutual Fund (MF) is based on and what it's risks are. Or is this some form of money market or bond fund. Regardless, it probably fluctuates and adjusts with interest rates, or it would be a bond. Generally, without specifying or qualification, a MF generally refers to a stock fund. Whatever the case, the CD is almost riskless, therefore carries the lower yield.

Let’s look at Investment Company of America (ICA), owned and operated by American Funds (AF). AF is an awesome fund company for a couple of reasons. There are several advantages and disadvantages:

1.AF is a private company which means they only answer to their MF holders. Fidelity is a good company also, but they are owned by stock holders. In the long run the company that only answers to you, the MF holder, is going to look out for your best interests.

2.AF also has some of the lowest annual fees to maintain an account of any MF company. All that being said, depending on your situation ICA may or may not be good for you. You need a competent advisor to help you with that.

3.I would be cautious with ICA as it is one of the largest MF in the world. They may seem like a good thing but it actually can be bad. It means it has much less flexibility to move its money around when conditions warrant it.

4.As far as EJ goes, they hire people on average who have very little experience in the industry, so at a minimum make sure your rep has a lot of experience and didn't just start last month at this. They also have agreements with companies like American Funds where their reps get a bigger commission to them then they do with other products. The concern being your advice from EJ might be tainted by the reps desire to get more commission. You need to work with an independent rep to assist you with you decisions; one who will give you all the information and doesn't have a hidden agenda.

Now let's look at MF's, in general, or the decision to use one at all.

If you invest in a MF, you have turned that responsibility over to someone else. To me, they are mostly the same, in general, in terms of results. Fewer than 10% can beat the Dow or other index it follows because of their fees. Why would you pay someone you don't know, whom will almost certainly underperform the market, an annual fee of 2.5% to do something you can do yourself, and do it better by buying an ETF, without any input from you after the initial purchase? An ETF is a publicly traded “Exchange Traded Fund, that trades just like a stock). Just buy the Diamonds (the DJIA ETF) if you want to let it ride on the Dow, or the Spyders (SPY - the S&P 500 ETF), or the Nasdaq (QQQQ), or diversify across the entire market by buying all three. The ETF's trade just like a stock or MF. If you want to diversify, and you want to Buy and Hold, buy an ETF.

A MF is always "in" the market, so you are at the mercy of the ups and downs of the Dow. Since you don't manage your risk, you can't put a Protective Stop on a MF, at say 10%, to lock in your profits when the market goes down. Since you spend more time watching TV, or more time deciding the color of your new car, than you do on learning how to manage money, you don't have a clue what's going to happen. That is not my idea of investing.

Actually, if done properly, it is more work to investigate all of the MF's and their advisors and their traders and their fees and their methods, than it is to investigate all the similar applicable info about stocks. You shouldn't choose to be ignorant, regardless of your investment vehicle, and just blindly turn your money over to a stranger because they are "listed," like you do at a bank. Some MF's are downright reckless and go out of business. Stocks are "listed," as are commodities and ETF's and everything else. With a mutual fund, you've just added a whole new set of unknowns to the equation, simply because you don't want to know anything about it.

The market is a living thing that does what it wants, and will go where it wants, when it wants. Nobody knows these things. Your question seems to interject that somebody has "The Answer." The best you can do in any investment is try to increase your odds of success and reduce your risk. You can do these things yourself, but not in a mutual fund.

MF's are so 20th Century. Relics of the past. Unneccessary. Buy an ETF. Or sell an ETF short and bet on the downside. There are two sides to every market, not just the upside.

Or you will undoubtedly find a corporate bond yield higher than 8%.

Answer 2

That depends. You haven't provided enough information. I'm guessing your mf is a high yield account which means that if the economy slows it could drop in value. You also didn't say what time frame you have. Or how old you are. Or what your income is. These are factors too. For most people, the short term would be the CD. If you have a horizon of 5 or more years consider moving your mf to an "asset allocation" or balanced fund which is more likely going to give you about 8% return over those 5 years.

Answer 3

the mutual fund compounds, so it earns more and more as each month goes by. but it may not be guaranteed.
Usually funds are based on its stock holdings, which could in fact lose value. A CD, however, is guaranteed, but doesn't compound.
Also, you can always pull the money out of the mutual fund without penalty (maybe just a small trading fee). The CD has to stay for the whole 12 months or else you get penalized.

Answer 4

Blue Frog,

It depends on your investment strategy. If you dont need the money for the next few years a mutual fund is more convenient, with a chance of having a return above the 6.5 you are making reference. If you have a shorter timeframe for using this money then the CD is more appropriate. With the stockmarket you minimize your risk by staying long. To avoid risk stay with the CD.

Answer 5

To me....the respond to this relies upon upon the purpose of the funding and some time body. IMO stocks or inventory mutual money are in person-friendly words a lengthy time period funding option. once you've lower than 3 years min. i does no longer even evaluate stocks or inventory mutual money. once you've the destiny time body besides the undeniable fact that, it really is difficult to triumph over a nicely different inventory portfolio for strong returns and minimizing probability. CD's are an exceedingly good position to park money that you don't desire on the instantaneous, yet will quickly (like 6 months or a 12 months). they are very look after and grant you with with someplace round a 5% go back. the draw back is that you won't be able to get at your money until eventually the time of the CD is up without paying consequences. yet another unfavorable is that because you're incomes interest and under no circumstances capital positive factors (like once you purchase a inventory at a particular value and it is going up that's termed capital positive factors) the interest from a CD is taxed as undemanding income. Genereally conversing for most folk capital positive factors are taxed at a decrease cost. in case you do not have the time-body for stocks yet do not opt to be locked into the time period of a CD a money marketplace is an exceedingly good option. It can provide strong intersest costs 4.5% plus on the instantaneous, yet without locking you right into a particular time body. Many money marketplace money owed help you write checks and many actually have debit playing cards with them. if you're extreme about wanting to make investments i'd recomend chatting with a economic consultant that you think and putting jointly someone funding technique. in case you do not opt to positioned that a lot into it or you in person-friendly words have somewhat to commence with and also you want to make investments in mutual money you could attempt a mutual fund like the Ivy Asset technique fund. I own this fund and prefer it. It helps the managers of the fund to make investments in any marketplace the position they see a strong danger. it really is an exceedingly smart decision in case you do not have adequate to diversify your self, or do not opt to make the attempt to do it your self or hassel with it.

Answer 6

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Answer 7

check out the new online fdic insured money market accounts. they are very close if not above 5% now, and most compound monthly, and you remain completely liquid (not so with CD)