So, you want to invest money and make more interest. You also want safety and access to your funds. Ordinarily, smart investors look to T-bills or other money market securities … but they are paying peanuts. The question is where to invest money to make more interest when interest rates are low.
Here we address some of your alternatives for investing money conservatively. First, a warning. When considering where to invest money to make more interest, beware of special offers that promise attractive interest rates. No one legitimate is going to offer guaranteed or safe interest rates of 5% or more with ready access to your cash when money market rates are at or below 1% or 2%.
Since starting in the investment business in 1972, I generally recommended money market mutual funds to folks who wanted to invest money to earn competitive interest rates with high safety and liquidity (ready access to your money). With these funds paying miserly interest, what other investment options should you consider?
Your safest investment options when investing money can be found at banks and credit unions. Shop around and compare interest rates and terms on money market accounts, savings accounts, CD’s and special offers. Sometimes a local bank will offer higher interest rates because they have a good demand for loans.
If you have experience investing money in individual securities look into short-term bonds and T-notes. If not, consider the following types of mutual funds. Do not invest in funds that have a sales charge (load) or heavy yearly expenses. You’re trying to make more interest, and these costs can negate any extra interest income you gain.
NO-LOAD funds are worthy of your consideration. There are NO sales charges for investing money. Look for no-load funds with yearly expenses of less than ½ of 1%.
Short-term bond funds should pay more interest (mutual funds pay interest in the form of dividends) than money market funds, without significant risk. To get even higher dividends you might consider intermediate-term bond funds for a moderate portion of your investment assets. These funds involve a medium level of interest rate risk … if interest rates rise, these funds can lose value.
Don’t push the envelope in deciding where to invest to make more interest. Long-term bond funds and high-yield bond funds might pay even more interest; but they can be risky investments, especially in times of rising interest rates.
Consider tax-exempt (tax-free) money market, short-term and intermediate-term bond funds. The higher your tax bracket, the more attractive these investment options become.
There are two types of balanced funds that are labeled as conservative income funds: lifecycle income funds and target retirement income funds. These are typically funds that invest in other funds of the same mutual fund family. Before you invest money here, check to see where they invest your money. They often invest 10% or so in stock funds and a considerable amount in longer-term bond funds.