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Like all investments, it’s important
to understand the risks of CDs.
by Rolf M. Gatlin |
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Most investors are tired of being beaten black and blue by today’s stock market. In the midst of corporate scandals and a softening economy, investors have lost confidence in equities. They are returning to conservative investment vehicles such as CDs (certificates of deposit) to preserve what remains of their nest egg. While CDs provide investors with a stable return insured up to $100,000 by the FDIC, there are a couple of factors you might consider before committing a substantial portion of your savings to a banking institution. First, consider the return on investment.According to Bankrate.com, the overnight average return on a one-year CD was roughly 2.40 percent and 4.16 percent for a five-year CD, as of June 30, 2002. However, this seems high when considering the latest quotes from these top U.S. banks: |
Data as of 6/30/02 |
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With these rates, it is understandable why investors would be searching for a better return with similar associated risk. One investment alternative to a CD is a municipal bond fund, such as U.S.Global’s Near-Term Tax Free Fund (NEARX), which invests in tax-free municipal bonds. Compare NEARX’s one-year total return and five-year annualized total return listed on page 5 to the average returns on one-year and five-year CDs. The investor can clearly see the benefit to investing in the fund versus a CD, especially when considering NEARX’s tax incentives. However, one thing the investor must remember about mutual funds is that they are subject to share-price volatility and are not insured by the FDIC. Second, consider the early-withdrawal penalty associated with CDs. CDs do not offer the benefit of instant liquidity. Under federal mandate, banking institutions are required to charge a minimum penalty of seven days interest for early withdrawal on any deposit classified as a time deposit. Often investors put their money into CDs and regrettably do not review the fees that can be levied against their accounts if the money is withdrawn before the CD matures. Although there is a minimum requirement, there is no set maximum penalty banks can charge. If the investor is looking for stability of principal, while foregoing liquidity, then CDs may be the investment vehicle of choice. But before you make your decision,take a look below at the estimated effective yield on one-year and five-year CDs when investors decide to withdraw their money early from these top U.S. banks: |
Data as of 6/30/02
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The Near-Term Tax Free Fund’s annualized total return for the 1-, 5- and 10-year periods was 5.65%, 4.76% and 4.93%, respectively, as of June 30, 2002. Performance data quoted represent past performance and investment return,and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The adviser for the Near-Term Tax Free Fund has guaranteed total fund operating expenses (as a percentage of net assets) will not exceed 0.70% through June 30, 2003, or until such later date as the adviser determines. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. |
