Certificates of deposit (CDs) and mutual funds offer many of the same advantages—both can be low-risk, low-cost ways of putting some money aside for the future and earning a return in the meantime. However, there are important differences between CDs and mutual funds. In this article, we’ll look at those differences, so you can choose the investment that is right for you.
- Certificates of deposit are issued by banks, credit unions, and other financial institutions. They provide a guaranteed interest rate and are often insured by the federal government.
- Mutual funds invest in a diversified portfolio of securities, and their returns will fluctuate.
- In general, CDs are safer than mutual funds, but mutual funds have the potential for significantly higher returns.
CDs vs. Mutual Funds: The Key Differences
A certificate of deposit is a financial product offered by a bank, credit union, or other financial institution. When you purchase a CD, you agree to leave your money there for a certain period of time. In exchange, the financial institution will pay you a set interest rate on the money—one that is typically higher than you’d receive on a checking or savings account. The downside is that your money isn’t liquid—you have to leave it in the CD for the whole term you’ve agreed to, or you’ll pay hefty penalties.
A mutual fund, in contrast, invests in a diverse pool of securities like stocks, bonds, money market instruments, and other assets. Mutual funds can be either actively managed or passively managed. Actively managed mutual funds are run by professional money managers, who buy and sell securities according to the fund’s objectives, such as growth or income. Passively managed funds simply attempt to replicate the performance of a particular index, such as the S&P 500. A mutual fund’s performance is measured in terms of its total return.
Because of their diversification, mutual funds offer many of the advantages of investing in securities—potentially…
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