What are Share Certificates?
If you want to diversify your current investment portfolio – or if you’re just starting out and want to build on your funds, Share Certificates are something to consider. Similar to their Certificate of Deposit or Time Deposit counterparts, Share Certificates are fixed rate investments and federally insured. They offer a specified rate of return for a set period, ranging from three to 60 months. You gain the security of guaranteed earnings with no worry of losing principal. If the Certificate offers compounding interest, you’ll earn more as interest builds with the frequency of interest payments.
Share Certificates are also a solid choice if you want better earnings than a typical savings account, but you will need the flexibility to commit your funds for a set timeframe. The rate of return (interest earned) will correspond to the length of time you commit your funds. The longer the term, the higher the return. Because the funds and earnings are guaranteed, Certificates may have a lower payout than riskier investments, such as stocks or mutual funds.
Why is a Share Certificate a good idea?
A balanced investment portfolio begins with diversifying, or splitting up the total value of your investments among different types of products. As part of an investment mix, Share Certificates can help you to balance risk. Diversification also gives you a chance to earn more as a single investment gains value.
Share Certificates also work well if you have enough funds to spread over varying terms or maturities. This strategy is known as ‘laddering’ your investments and enables you to earn more on funds invested over longer periods while still having access to funds from shorter terms. So, instead of investing one lump sum into a single Certificate, divide the funds evenly, and invest in several separate Certificates that mature over fluctuating intervals.
Investor.gov explains that with an effective laddering strategy, you have the opportunity to take advantage of potentially rising rates or to search for more competitive rates before a Certificate rolls over into a new term. Effective laddering deflects interest rate risk by providing added flexibility.
Be realistic as to when you need the funds.
Like any investment opportunity, you need to consider the pros and cons and whether or not you might need access to funds. You should feel comfortable in designating your money for the agreed-upon time because, if you need to make an early withdrawal, you will pay a penalty which can reduce both interest earned and principle. Penalties vary, but financial institutions commonly charge 180 days’ worth of interest as a penalty. By law, penalties, including those for early withdrawal, must be clearly stated as should the maturity date.
To avoid paying a penalty, establish a game plan first. If you’re not sure how long you can keep your funds invested, think about a shorter Share Certificate term or possibly a Money Market account, which is also federally insured. Note that while Certificates offer a steady rate of return, there is some risk inflation could grow faster than your money, and lower your real returns over time (source: investor.gov). A financial advisor can explain further the impact of inflation on your investments.
Here are a few points to consider with a Share Certificate:
- Will you earn simple or compound interest?
- What is the APY (Annual Percentage Yield)?
- Are the funds insured?
- Can you position your funds to take advantage of climbing rates (i.e. future opportunities)?
- Will you need access to the funds?
- What are the penalties for early withdrawal?
- Does the term enhance or balance your current investment mix?
Bottom Line
Share Certificates are a straightforward investment option, and, as part of the portfolio mix can lead to a balanced investment strategy. While earnings may be less than the stock market, the assurance of guaranteed funds and a fixed return often outweighs any downside. At United, you have a variety of Certificate terms and if you choose to ladder your funds, you’ll have peace of mind with greater access to funds.
To learn more about your investment options, contact United Federal Credit Union at (888) 982-1400. Deposits are federally insured by the National Credit Union Administration (NCUA) up to $250,000 per account.
