Looking for some relatively low-risk ways to earn a respectable return? You're in luck. Aided by rising interest rates, you have some promising options.
Below, we outline a variety of low-risk investments and accounts that can offer a decent return—at least while interest rates are high. Before selecting one option—or a combination—be sure to consider your goals, risk tolerance, and investment horizon.
As you think through your strategy, keep in mind that there's often a risk-reward trade-off, says Richard Carter, a vice president of fixed income products and services at Fidelity Investments.
"Do your homework," Carter says. "Diversifying the investments in your portfolio can help manage risk even within what might be considered low-risk investments. When evaluating fixed income investments investors need to recognize that even low-risk investments may involve differences in the degree of credit or default risk, their amount of price volatility, and the timing of their payouts or return profile."
If you need guidance, a Fidelity professional can help you create a plan that's right for you.
1. Certificates of deposit (CDs)
CDs provide reliable, fixed-rate returns on a lump sum of money over a fixed period of time, such as 6 months, 1 year, or 5 years. You can get a traditional CD at a bank or credit union where they are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA). They typically require a minimum deposit, and you’ll be hit with a penalty if you pull your money out before the CD matures.
You can also get brokered CDs—which are similar to bank CDs in that they are FDIC-insured but differ in that they are issued by banks to customers of brokerage companies as securities that can be held in a brokerage account. Brokered CDs are usually issued in large amounts to the brokerage, which it then divides into smaller parts for resale.
With a brokered CD, the broker’s underlying CD purchase from the bank is insured. So in the off chance insurance is needed, it will flow from the bank to the brokerage to the investor.
Brokered CDs are subject to the same FDIC limits as traditional CDs. But buying CDs through a brokerage firm can help you expand the amount of FDIC protection inside a brokerage account by buying multiple brokered CDs from different issuers.
Unlike traditional CDs, brokered CDs can be bought and sold on the secondary market before they mature. But doing so will incur trading fees and the price you are able to receive on the secondary market may be below the price you originally paid for the CD.
If you buy a brokered CD as a new issue CD at Fidelity, there are no management fees or transaction costs if you hold it to maturity.
Find CDs and the latest rates at Fidelity: Fixed Income, Bonds, and CDs
2. Money market funds
Money market funds are mutual funds that invest in short-term, low-risk assets like Treasury and government securities, commercial paper, or municipal debt—depending on the focus of the fund. Because their underlying investments are typically high quality, they are generally less volatile than other types of mutual funds, such as stock funds.1
Money market funds offer diversification and liquidity. Yet, as with any other investment, there are potential downsides, such as the fact that the income you receive on your investment will fluctuate both up and down in relation to the yields available on the securities in which money market mutual funds invest. In addition, the money is not protected by the FDIC or NCUA.
You can purchase a money market fund from a brokerage or a fund company. At Fidelity, any uninvested cash deposited in a Fidelity brokerage account is automatically put in a money market fund (
Find money market funds at Fidelity: Mutual Funds Research (Choose money market funds from the dropdown menu under Asset Class and Category.)
3. Treasury securities
This investment option is backed by the US government and comes in 3 types: bills, notes, and bonds. Bills mature in one year or less, notes span up to 10 years, and bonds typically mature in 20 to 30 years. When you buy any of these, you're lending money to Uncle Sam. At the end of the term, you'll get your initial investment back—known as the principal, face value, or par value—plus the interest you've earned.
The government also offers Treasury Inflation-Protected Securities (TIPS.) TIPS have a fixed interest rate, but the principal adjusts with inflation or deflation, as measured by the Consumer Price Index (CPI). While TIPS can help you hedge against inflation, their interest rate is often lower than other Treasury securities.
Find Treasury securities and the latest yields at Fidelity: Fixed Income, Bonds, and CDs
You can also buy Treasury securities at a bank, credit union, brokerage, or directly through the government via its TreasuryDirect program. But Carter notes, "TreasuryDirect only allows you to invest in Treasury securities at the auction, as new issues. Fidelity allows you to purchase Treasurys at the auctions and to buy and sell Treasurys in the secondary market."
4. Agency bonds
Government agencies and government sponsored enterprises (GSEs) issue bonds as a way of raising money. GSEs include the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Banks and the Federal Farm Credit Banks. Bonds issued by GSEs are subject to credit and default risk.
Federal agencies, on the other hand, such as the Government National Mortgage Association (Ginnie Mae), are part of the federal government and they are backed by the "full faith and credit" of the US government. Ginnie Mae, however, does not issue bonds directly; it insures or guarantees mortgage-backed securities originated by other lenders.
However, not all agencies have government backing; one example is the Tennessee Valley Authority (TVA). TVA bonds are not backed by the US government. Instead, they're backed by the revenues generated by the agency's projects.
Some of the potential benefits of agency/GSE bonds include slightly higher yields than US Treasurys of the same maturity and agency/GSE bonds tend be of high credit quality.
Find agency/GSE bonds and the latest yields at Fidelity: Fixed Income, Bonds, and CDs
5. Bond mutual funds and exchange-traded funds
These securities pool different bonds together, allowing you to easily diversify. Mutual funds and exchange-traded funds (ETFs) are composed of individual bonds that can mature. Yet, the funds and ETFs will themselves continue to trade, as bonds can be consistently bought and sold within them.
Mutual funds and ETFs are often managed by professionals and come in many different forms, so you can pick one that meets your objectives and risk tolerance. You'll also get liquidity since you won't be constrained by a maturity date. But you'll have to determine when the right time is for you to sell.
You'll get monthly returns, but they can be inconsistent. In addition, you may have an initial sales charge, as well as additional management fees. While the diversification of a mutual fund or ETF can help mitigate credit risk, their value can fluctuate based on market conditions, so they can be riskier than savings accounts or a government-backed bond, particularly if you have a short-term investment horizon and the mutual fund you're considering invests in longer-term, more volatile securities.
You can also get these securities through a brokerage or fund company.
Research bond funds and performance at Fidelity: Fixed Income, Bonds, and CDs
6. Deferred fixed annuity
This type of annuity is issued by insurance companies and typically provides investors with a guaranteed rate of return over a set period of time, such as 3 to 10 years. Your investment grows tax-deferred, compounds over time, and—a big benefit—there are no IRS contribution limits.3
Annuity guarantees are subject to the claims-paying ability of the issuing insurance company, rather than the FDIC. There are no up-front sales charges but surrender charges and potentially a market value adjustment may apply if you opt out early. However, to provide access to your investment, these products generally allow 10% annual penalty-free withdrawals.4
A deferred fixed annuity is often best suited to investors who meet one or more of the following criteria:
- Approaching or in retirement
- Subject to high tax rates
- Planning to use the assets after age 59½
At Fidelity, you can compare the deferred fixed annuities available through The Fidelity Insurance Network®:5 Deferred fixed annuities
If you're interested, you can open one by calling an insurance licensed representative: 800-544-4702