The decision to put money away in mutual funds or some type of savings account depends on how much you want your investments to grow and the risks you are willing to take. For example, mutual funds contain investments linked to the stock market, which can rise and fall along with the money you invested. Savings accounts remain secure. You won’t lose money, but you won’t get the high returns you could get through a rising stock market.
Safety or Risk
Your money stays safe in a savings account, because most banks have deposits insured through the Federal Deposit Insurance Corporation, or FDIC, which guarantees protection of your savings up to $250,000 for each signature on the account. Mutual funds don’t have the insured protections. Investments in a mutual fund include stocks and bonds that can fluctuate in price. You stand a chance of making great gains, but you also face the risk of losing money, depending on market conditions.
Interest rates on the money you put in a savings account are usually fixed, although they may change periodically. You earn money based on the amount you have or continue to add in your savings account. The interest rate helps your account grow. The longer you leave your money in the account, the more money you earn from the interest. However, savings accounts grow slowly because of the fixed interest rates. Mutual funds have investment risks, but you can increase your wealth because of the diversity of the assets.
A mutual fund invests in a wide range of stocks and bonds to lower your investing risk. The fund might have investments in dozens companies across different industries. If certain stocks in the fund perform poorly, the many other investments generally make up for it with increases in price that bring profits to the fund. This also means you have to watch your investments on a regular basis, selling poorly performing funds and replacing them with investments with more growth potential. A savings account doesn’t require the periodic monitoring. You just put your money in there and let it grow gradually.
You can open a savings account easily at the bank of your choice. You usually have easy access to your money through limited withdrawals each month without being charged a fee, depending on the type of account and bank policy. You only pay fees if you go over that limit. You pay fees for mutual fund transactions, such as selling or buying shares, because fund managers need to move those investments. Mutual funds might also include costs such as advisory and brokerage fees.
Testing the Market
Although you can escape worries about losses through a savings account, mutual funds test out the stock market without the stress of daily stock trading at investments as low as $50. You can also own mutual funds through a 401(k) plan at work. Typically, you discuss your goals with a financial adviser at your bank, work or investment service. You make the final decision on what to invest in, just as you would decide on whether to go with a savings or mutual fund account, according to the way you want to handle your money.
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