A Money Market CD is a very safe, short term investment that will generate revenue and should be in that part of your portfolio reserved for the most conservative and reliable investments. They are offered by banks and some other financial institutions and are for a specific period of time. Some or all of the CD is guaranteed by FDIC, making the CD one of the very safest investments available to the investor.
CDâ€™s are commonly issued for periods as short as one or two months up to periods as long as five years. They also have some very stringent penalties if you need to cash them in before they mature, so make certain you select a period that fits into your plans.
The return is guaranteed. While the return is not as rich as many other investments, it is guaranteed. It is an amount that you can put into your budget and know that it will be there to generate revenue for you.
The risk associated with interest rate fluctuations is removed â€“ One of the more complex financial ideas is the inverse relationship between interest rates and principal value. For a fixed income instrument such as a bond, the value of the bond will fall as interest rates go up. The purchase of any longer maturity instrument has this inherent risk. This is particularly relevant in todayâ€™s world where interest rates are very low and are quite likely to increase over the near to mid-term future. Any increase in interest rates will cause longer term bonds to lose some principal value. Money Market CDâ€™s, however, because they are shorter term and will cash in at full value, are exempt from this risk.
If you will need cash at a specific future date, college tuition for one of the kids, or a cruise after retirement, the CDâ€™s certainty of repayment at that date will make your planning much easier.
The principal is secure â€“ many investments carry with them the risk that the issuer will be unable to repay the investor or that the market will lose value. Who would have thought that GM would go bankrupt? But that has happened to many blue chip companies over many years. Successful railroads and manufacturers and many others have gone bankrupt.
Money Market CDâ€™s, on the other hand, are issued by banks and guaranteed by the FDIC, making them very loss-proof.
Money Market CDâ€™s are an investment that should be in your portfolio representing the safest of your investments. They will not only generate revenue for you, they will be an important part of the timing as you plan your need for future funding.