Corporations sometimes raise money by issuing bonds to investors.
Small investors can get exposure by buying shares of short-term corporate bond funds. Short-term bonds have an average maturity of one-to-five years, which makes them less susceptible to interest rate fluctuations than intermediate- or long-term.
Corporate bond funds can be an excellent choice for investors looking for cash flow, such as retirees, or those who want to reduce their overall portfolio risk but still earn a return.
Risk: As is the case with other bond funds, short-term corporate bond funds are not FDIC-insured. Investment-grade short-term bond funds often reward investors with higher returns than government and municipal bond funds.
But the greater rewards come with added risk. There is always the chance that companies will have their credit rating downgraded or run into financial trouble and default on the bonds. Make sure your fund is made up of high-quality corporate bonds.
Liquidity: You can buy or sell your fund shares every business day. In addition, you can usually reinvest income dividends or make additional investments at any time. Just keep in mind that capital losses are a possibility.
S&P 500 index funds
If you want to achieve higher returns than more traditional banking products, a good alternative is an S&P 500 index fund.
The fund is based on hundreds of the largest American companies, meaning it comprises many of the most successful companies in the world. For example, Berkshire Hathaway and Walmart are two of the most prominent member companies in the index.
Like nearly any fund, an S&P 500 index fund offers immediate diversification, allowing you to own a piece of all of those companies. The fund includes companies from every industry, making it more resilient than many investments. Over time, the index has returned about 10 percent annually. These funds can be purchased with very low expense ratios (how much the management company charges to run the fund) and they’re some of the best index funds to buy.
An S&P 500 index fund is an excellent choice for beginning investors, because it provides broad, diversified exposure to the stock market.
Risk: An S&P 500 fund is one of the least-risky ways to invest in stocks, because it’s made up of the market’s top companies. Of course, it still includes stocks, so it’s going to be more volatile than bonds or any bank products. It’s also not insured by the government, so you can lose money based upon fluctuations in value. However, the index has done quite well over time.
Liquidity: An S&P 500 index fund is highly liquid, and investors will be able to buy or sell them on any day the market is open.
Dividend stock funds
Even your stock market investments can become a little safer with stocks that pay dividends.
Dividends are portions of a company’s profit that can be paid out to shareholders, usually on a quarterly basis. With a dividend stock, not only can you earn on your investment through long-term market appreciation, you’ll also earn cash in the short term.
Buying individual stocks, whether they pay dividends or not, is better-suited for intermediate and advanced investors. But you can buy a group of them in a dividend stock fund and reduce your risk.
Risk: As with any stock investments, dividend stocks come with risk. They’re generally considered safer than growth stocks or other non-dividend stocks, but you should choose your portfolio carefully. Make sure you invest in companies with a solid history of dividend increases rather than selecting those with the highest current yield. That could be a sign of upcoming trouble. However, even well-regarded companies can be hit by a crisis, so a good reputation is finally not a protection against the company slashing its dividend or eliminating it entirely.
Liquidity: You can buy and sell your fund on any day the market is open, and quarterly payouts, especially if the dividends are paid in cash, are liquid. Still, in order to see the highest performance on your dividend stock investment, a long-term investment is key. You should look to reinvest your dividends for the best possible returns.