Cash Alternatives Of the major investment vehicles, cash alternatives tend to be the most stable, meaning there is typically little fluctuation in the value of the investment. For this reason, they could provide some protection during turbulent economic periods and may be an appropriate place to keep emergency funds. The principal value of cash alternatives may be subject to market fluctuations, liquidity issues, and credit risk. It is possible to lose money with this type of investment. Cash-alternative savings vehicles include the following. Bank savings accounts usually offer safety in the form of FDIC insurance but a relatively low rate of return.* They don’t require a large initial investment, and the funds in them are readily accessible. Certificates of deposit are short-term loans to a bank, credit union, or savings association. They offer a moderate rate of return and FDIC insurance.* CDs usually require a larger initial investment than savings accounts, and you must leave your principal invested for a set term in order to avoid penalties. Money market funds invest in a variety of short-term debt securities and can usually be liquidated fairly easily. Many investors use them to hold the proceeds of investment sales temporarily until they are ready to reinvest the money. Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. *Bank savings accounts and CDs are FDIC insured for up to $250,000 per depositor, per insured institution, and offer a fixed rate of return, whereas the value of money market mutual funds can fluctuate.
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