Due to the variety of options on the market and the unpredictability of the economic climate, it is difficult to identify one investment that is clearly safest. But some investment categories are significantly safer than others. For example, certificates of deposit (CDs), money market accounts, municipal bonds and Treasury Inflation-Protected Securities (TIPS) are among the safest types of investments.
Certificates of deposit involve giving money to a bank that then returns it with interest after a certain period of time. All bank accounts, including CDs, are guaranteed by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, so even if the bank is unable to pay you back, the FDIC will, up to that amount. However, the yield of CDs is relatively low. For example, according to a 2015 Bankrate survey, 5-year CD yields were 0.87% annually.
Money market accounts are similar to CDs in that both are types of deposits at banks, so investors are fully insured up to $250,000. You can withdraw and deposit into money market accounts freely, unlike CDs, although there may be a maximum number of withdrawals per period. An investor does not have to keep the money in the account for a specified amount of time. Some banks require a minimum balance in money market accounts and charge maintenance fees if this minimum balance is not maintained.
Municipal bonds are debt issued by the towns, cities, counties and states. These bonds are very safe if the issuer is not likely to default, and because they are tax-exempt, they can have very high yields given their level of safety. TIPS are debts issued by the federal government with par value matched to inflation, so investors are protected from the risk of inflation while taking on the debt that is highly likely to be repaid.
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