Mutual funds are a collection of stocks and/or bonds professionally managed by different investors or financial service companies.  These groups research stocks and other mutual funds and make all the buying and selling decisions.

Advantages of Mutual Funds
The biggest advantage of mutual funds is that the investments are automatically diversified; thus, the owner of the fund will receive a large number of stocks within the mutual fund, which lessens the risk that comes from buying individual stocks.  This diversified nature results in the fund spreading out its risk in various sectors.  When some stocks have setbacks, others can go up, thus offsetting significant risk.  Major mutual funds generally hold dozens if not hundreds of different stocks in various industries.  It is the diversified nature of mutual funds that makes them so appealing to various fund owners.

Along with the benefits of diversification, there are other reasons to invest in mutual funds.  As discussed briefly, investors who purchase these funds have professional managers who manage and monitor the portfolios.  Next, there is the issue of transaction costs.  Because mutual funds purchase and sell large amounts of stocks at a time, there are fewer transaction costs compared to what an individual would pay for individual stock transactions.

There are also the benefits of the ease of purchasing mutual funds.  Buying them is relatively simple as virtually all banks have their own line of mutual funds, and there is only a relatively small investment required.

Earning Money
There are three ways for an owner to earn money from a mutual fund.  First, bonds pay interest, stocks pay dividends, and funds pay income in the form of distribution.   Next, funds pass on capital gains, in which funds sell stocks that have had a price increase, to the investors via distributions.  Finally, the owner can sell a mutual fund for a profit if the holdings have gone up in price, yet not sold by the manager, thus resulting in the shares’ increasing value.   The fund owner normally has the choice of whether to receive a check for distributions or to reinvest the earnings for more shares.

While the benefits of mutual funds are clear, there are also some potential disadvantages that should not be disregarded.  While one can view a fund’s professional manager as always being qualified to make the proper decisions regarding the investment, management is by no means infallible.  Regardless of the fund making or losing money, the manager will still receive compensation.  There is controversy whether or not such fund managers are any better than the average consumer at picking stocks.

Mutual funds are also somewhat complicated to fully understand, as many of their costs are unclear, in particular if the professional manager does not have a strong grasp or understanding of the market.  There is also a concern regarding too much diversification.  While mutual funds have small holdings in different companies in order to best protect the owner, there is also the issue that high returns from a few of these investments may not seriously affect the overall return.  Such dilution also occurs when a successful fund becomes too prosperous, and the manager may not be able to locate a good investment for all the new money.

Finally, fund managers normally ignore one’s personal tax situation when making financial decisions.  Sometimes it is to the owner’s advantage to defer a capital gains liability, which may have been triggered if the fund manager sells a security.

To learn more about mutual funds and cd rates go to

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There are numerous terms and conditions, as shown in the Truth in Savings booklet or other disclosure documents that an investor should read and comprehend before purchasing a CD.

CDs – Terms and Conditions

First, the terms may state that the institution selling the CD can close the CD prior to its maturation.  Second, institutions may have the right to delay withdrawals in case of a bank run, where many, often panicked depositors try to withdraw their money from a bank because they think it will fail.  Third, the terms will discuss how interest will be paid out.  Fourth, the terms will dictate how and when the CDs will start earning interest.  Fifth, an institution may not be required to send in a notice of automatic rollover at a CDs maturity; the terms and conditions will explain this in detail.  Sixth, the terms will discuss the penalties for early withdrawal. And seventh, the terms may specify fees for providing certified checks.

Various CDs
Banks can issue callable CDs, where they reserve the right to buy back the investment.  On a certain date, the banks will determine whether or not they should leave the investment outstanding or to replace it.  For example, a five-year CD with a six-month call protection would be callable after the first six months of the term.  Callable CDs shift the interest-rate risk to the depositor and thus have a higher yield than those without the call provision.

Brokered CDs, which are offered by brokerage firms, financial advisors, financial consultants, and financial consultant, are held by a group of unrelated investors where each one owns one piece.  Like other CDs, the investor agrees to keep his money deposited for a specified term, and the bank or credit union will then pay a certain amount of interest.

Liquid CDs allow the investor to withdraw certain amounts of the principle without any penalty.  There are limits as to how much money can be taken out and how may withdrawals he can make,  The interest rates of Liquid CDs are likely higher than the bank’s money market rate, but lower a traditional CD.

Bump-Up CDs allow for great flexibility, as bank can increase the interest rate of the CD to a rate offered by the issuing bank.  This clearly benefits the investor as he will now receive the highest rate without incurring any penalties.  Those who invest Bump-up CDs anticipate interest rates will increase in the near future.  Additionally, most banks tend to offer bump-up CDs with maturity of two year.

There are numerous other kinds of CDs.  Variable Rate CDs are tied to the outcome of market indices.  These CDs allow investors to earn the highest CD rates during the term of your certificate of deposit, and they are linked to US Treasury note rates.  Add-On CDs allow for additional deposits during the term.  Zero Coupon CDs have a massive discount from the CD’s face amount, though the maturity terms are far longer and they do not pay interest until the date of maturity.

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CD-based IRA Accounts

Aug 17, 2009

IRA accounts are tax-deferred savings accounts that investors often use for their retirements.

Investors often make such investments because the funds deposited in IRA accounts will grow without any taxes on interest, dividends or capital gains until the money is withdrawn at maturity. An IRA asset can be a mutual fund, a specific stock or simple cash, or a CD.  One of the draws to using a CD is that they are usually insured and so the investors’ assets are generally safe, despite a somewhat low return rate.  Presently, the FDIC and NCUA raised the insurance limit for IRAs to $250,000 per banks and credit unions.

Most banks market CD based IRA accounts to their customers, which creates a misperception that there is a difference between CD-based IRA accounts and traditional investment-based IRA accounts.  In fact, the difference is nominal, as an IRA is simply a special tax status applied to various investments, and the rules and regulations for such accounts are the same for all types of investments.       

Time Frames for IRA CDs
CDs have time frames equal to the money left within the CD; in other words, a three-year CD would thus have a time frame of three years.  IRA CDs differ, however, as they have various rules and regulations regarding the use of the funds.  Such rules include substantial tax penalties if money is withdrawn from the account before its owner turns 59 1/2.  However, an owner can purchase a new CD or have one rolled-over into his IRA account without tax implications.

IRA accounts shield the owners from paying interest from taxes until the money is withdrawn.  Because of this, IRA accounts allow the investor to accumulate additional funds for retirement, as taxes need not be diverted from their retirement goals.  This allows the investor to have more money to put into his retirement.

There are other benefits to possessing an IRA CD.  First, the investor is in total control of the funds as the CD is opened under the owner’s title and social security number.  And second, banks and credit unions are sometimes willing to waive early withdrawal penalties.  As such, if the investor can find the best CD rate elsewhere or if he simply needs the funds immediately, the investor may have the opportunity to forego such penalties.

While CDs pay a higher interest rate than other savings and checking accounts, they traditionally do not return as much as other investments over a longer period of time.  For example, an investor would be better off putting his money into some securities if he is seeking a substantial profit and is willing to absorb the risk.  As such, an investor with several years until retirement may be much better served by investing for their retirement in other opportunities within their IRA rather than a CD.

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If you have looked for the best interest rate for a savings account, no doubt you know that they can fluctuate greatly. Because they are based upon current federal reserve rates, which in turn are based on the strength of US currency. Since these types of interest yields are unpredictable, you are wise if you keep abreast of the rates of traditional banks as well as the rates of increasingly popular savings accounts online.

Many banks and other financial institutions offer a type of investment called “high yield savings accounts.” These types of banking services offer higher annual percentage rate than regular savings accounts do. This is likely to be attractive to a consumer who is interested in do a comparison before deciding on what type of account to choose for savings and investment. However, you should keep in mind that they usually require a greater minimum balance for the particular bank or institution you’re considering. You may have to commit to a higher starting deposit, a higher average daily balance, or a limited amount of transactions allowed per month. Sometimes, you may be required to have a checking account tied to the savings account.

A popular alternative to store front banks, online banking services offer rates of interest that, in most cases, are significantly higher than traditional brick-and-mortar banks. Some of these banking services include ING Direct, HSBC Bank, Emigrant Direct Bank, GMAC Bank, interest rates for these institutions are higher because there is much less overhead associated with an online-only bank. Therefore, they can pass savings from operational costs on to consumers like you by offering higher interest rates.

If you research online, you’ll find that there are many resources available to you if you want to compare interest rates or cd rates and services between institutions, whether traditional store front, high yield, or online . You can easily do quick research for various types of saving products from a number of different financial institutions, as well as for versions of a savings account calculator, by going to such popular financial web sites as Financial Times and Motley Fool; you will be required to register, but it’s free. The calculator will help you estimate earnings on a particular investment based upon the initial investment, the length of time interest accrues, and the annual percentage yield received. With a little research you will be able to recognize and secure the best interest rate for a savings account online or at or at your local branch.

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