Certificates of Deposit vs. Mutual Funds
A certificate of deposit (CD) is a deposit account that offers a higher interest rate than a standard checking account. A mutual fund is an investment account of a portfolio of stocks, managed by a financial professional. There are many questions one must consider when choosing which account best meets their financial needs.
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Level of Risk
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A CD pays a specific interest rate. With a mutual fund, there is a chance that an individual's original deposit can be lost.
Date of Maturation
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When money is deposited into a CD, the agreed upon interest is paid after a specific amount of time (e.g. six month, 12 months and so forth). Money placed in mutual funds mature in sync with the stock market. Depending on the nature of the economy, this process could take years.
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Rate of Return
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When choosing to deposit money into a CD, the rate of return is pre-determined. The rate of return in a mutual fund, however, depends on the performance of the stocks in which it is invested.
Early Withdrawal
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If a person chooses to withdraw money from a CD prior to the pre-determined date, a penalty must be paid. Investors are free to withdraw from mutual funds, with no penalty charged.
Best Decision
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As there are many positives and negatives to each account, a licensed financial professional can assist individuals in making the best decision.
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References
- Photo Credit Image by Flickr.com, courtesy of Andrew Magill
