With the development of economy, more and more people begin to invest their money to earn extra income. However, investment always comes with risks. For investors who pursue stable returns, relatively safe investment products are preferable. Government bonds, treasury bills, bank deposits, money market funds are considered as relatively safe investments. In the following passages, I will introduce several common types of relatively safe investment securities in detail, including their definitions, characteristics, risks and returns. Properly investing in these products can help investors build a balanced portfolio and achieve stable growth of wealth.
Government bonds are relatively safe investments
Government bonds are debt securities issued by the government to finance expenditures. The government promises to repay the principal and interest on a specified date, so they are very safe investments. Different types of government bonds include treasury bills, notes, bonds and savings bonds. Treasury bills have the shortest maturity less than 1 year while treasury bonds have the longest maturity of over 10 years. Government bonds offer low but stable interest income. Although the returns are lower than other investments like stocks, the risks are minimal. Government bonds should be a crucial component of investors’ portfolio.
Bank deposits provide guaranteed principal and earnings
Bank deposits refer to the money deposited in banking institutions like saving accounts, time deposits and certificates of deposit. The bank would pay a certain amount of interest and guarantee the safety of the principal. Hence bank deposits are ideal for conservative investors who focus on capital preservation. Time deposits usually offer higher interest rates but require a minimum period of deposit. The rates also vary across different banks. Investors can shop around to find the best deposit rates. The downside is that bank interests are fully taxed as ordinary income. But overall bank deposits provide stable low risk returns.
Money market funds provide liquidity and diversification
Money market funds invest in short-term and highly liquid securities like commercial papers, treasury bills and certificates of deposit. The fund value is maintained at $1 per share. Money market funds provide higher returns than bank deposits with low risks. Investors can liquidate their shares easily to get the principal back. The diversified investments also reduce risks compared to investing solely in bank products. The SEC strengthened fund regulations after the financial crisis to limit fund exposure. Top money market funds are rated AAAm by ratings agencies. For conservative investors, money market funds offer a nice blend of stability, liquidity and returns.
Highly-rated corporate bonds offer higher yields
Besides government bonds, high grade corporate bonds like AAA and AA can also be relatively safe investments. They provide higher interest rates than government bonds while maintaining relatively low credit risks. Corporate bonds still carry the risk of default, so investors should analyze the financials of the issuer. Normally corporate bonds have higher risks than government and agency bonds. But investing in bonds from blue-chip companies can provide attractive yields without too much risk. Laddering bonds with different maturities can also reduce interest and reinvestment risks.
Diversify across investment types and issuers
In order to minimize risks while still earning decent returns, investors should diversify their portfolio with various relatively safe investments aforementioned, including government bonds, bank products, money market funds and highly-rated corporate bonds. It’s also important to diversify across different issuers and sectors instead of concentrating in one particular issuer. Maintaining an optimal asset allocation and diversification allows investors to enjoy stable investment gains over long term.
In summary, government bonds, bank deposits, money market funds and highly-rated corporate bonds are considered relatively safe investments that can generate stable income with minimal risks. Investors should analyze their risk appetite and investment goals, build a balanced portfolio across various securities and issuers to achieve steady growth.