Why CDs Are a Great Investment for People Who Don't Like Risk

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For risk-averse investors, finding a secure and reliable investment method can be challenging. While the stock market can offer sizable returns, it can also be very volatile. Meanwhile, letting your money sit in a bank account can mean it'll lose value, thanks to inflation.

Thankfully, certificates of deposit (CDs) let you maximize returns while minimizing risk. CDs are a type of savings account that allows you to earn a fixed interest rate over a set period, giving you a predictable return without the risk of losing your initial investment.

Here's why CDs are an excellent choice for risk-averse investors.

1. You know exactly how much you'll earn

CDs are one of a handful of investments that guarantee a specific percentage you'll earn on your initial investment and give you an exact timeline of when you'll get it.

For example, let's say you have $10,000 you want to invest, and you don't need that money soon for your emergency fund, car payments, or other expenses. If you put that money into a 5-year CD date that pays 4.00% APY, it will turn into about $12,166 over that period -- earning you $2,166.

With CDs, there's no guessing how much money you'll make. You can calculate the return upfront and decide whether it's a good decision for you or not.

2. You're guaranteed to get back what you put in

With a CD, you're guaranteed to get back whatever money you initially invested. This may seem obvious to some, but it's an important difference between other types of investments.

For example, let's say you have $5,000 to invest and you use it to buy a few stocks. A few months later, the stock market is in turmoil, and all of the stocks you own have lost half of their value. Within a short amount of time, your $5,000 is now worth $2,500.

That can't happen with CDs. At the end of the maturity date, you'll always get back your initial deposit plus any interest you've earned. One caveat to this is if you withdraw your money before the maturity date and are charged an early withdrawal fee, it's possible to receive less principal back if the interest earned doesn't cover the cost of the fee.

3. They're free (mostly)

CDs typically don't have any maintenance fees, so depositing your money into CDs usually won't cost you a dime. Just make sure you leave your money in the CD for the entire term, or you may have to pay a penalty.

For CDs with terms longer than 24 months, the usual early withdrawal penalty fee is 180 days of simple interest on the amount you withdraw early. For CDs with terms shorter than 24 months or less, the penalty fee is usually 90 days of simple interest on the amount you withdraw early. But penalties can vary by bank account issuer.

4. You have control over the terms

When you buy a CD, you can shop for a maturity length you're comfortable with, with an interest rate you like, and decide how much you want to invest. Of course, you don't have complete control over all these aspects combined, but you can shop around for CDs that match your needs.

For example, maybe you want a 1-year CD with a 5.00% interest rate. Or, perhaps you want a 3-year CD with a 4.50% interest rate and no minimum deposit. There are many options for CDs, making it likely you'll find one that suits you.

When choosing a CD, consider:

• The length of the maturity term
• The annual percentage yield (APY)
• The minimum deposit amount
• What the early withdrawal penalty fee is

5. CDs are FDIC insured

When you put money into a CD, it's essentially the same thing as putting your money into your bank account, as far as the government is concerned. Deposits in a CD are FDIC insured, which means your money, up to $250,000, is guaranteed if the bank holding the CD fails.

FDIC says the standard coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. This means that if you and your spouse opened a CD together, you could be protected up to $500,000.

While bank failures are uncommon, having your deposit insured by the government is far safer than having your money in a mutual fund, bonds, or stocks, which aren't FDIC insured.

High CD rates may not last much longer

Right now could be a good time for investors looking to lock in the best CD rates. With inflation slowing, the Federal Reserve has indicated it may cut interest rates later this year.

If that happens, CD interest rates will likely fall as well. So if you're on the fence about opening up a CD, consider this a gentle reminder that the window for maximizing your CD returns may be closing soon.

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