Suddenly, yield for liquid investments has increased—and it may help soften inflation’s bite.
Adam Kuerbitz, Fixed Income Specialist
A year ago, it didn’t matter much where you held your cash. Whether in a simple deposit account or money market fund, cash earned only minimal basis points.
Little wonder, then, that many people were keeping large amounts of cash in their deposit accounts.
But now, interest rates have risen. So where you allocate cash is starting to matter—a lot. And the ability to achieve a higher yield on liquid investments is especially important in today’s inflationary environment.
To help offset the erosion of purchasing power caused by inflation, it’s time to get strategic about how one might stay liquid while also potentially earning a higher yield today.
Here, we look at potential places where cash could be put to work, ranging from bank-insured savings to investment products. As a reminder, investment products are not FDIC insured, have no bank guarantee and may lose value and involve risks.*
These potential options depend on each individual’s needs, risk tolerance and timeline.
Banking options for individuals who:
1. Want to be extremely conservative—Consider funding a CD1 (i.e., a certificate of deposit account). Those who are comfortable leaving a sum untouched for an amount of time (typically for three months, six, nine or 12). For this concession, it may result in a higher yield than with a standard deposit account. These funds are also secured by the U.S. government, which are insured up to $250,000 in any single deposit account by the Federal Deposit Insurance Corporation (FDIC).
Investing options for individuals who:
2. Need daily liquidity—If willing to assume a relatively low level of risk in exchange for what are typically slightly higher returns, consider money market funds2, the yields on which have increased significantly since January 2022. Money market funds enable regular withdrawal money, but the funds kept in the account are actually invested in the market. Market funds are not federally insured, so there is possibility of loss. However, they generally invest in low-risk, high-quality, short-term debt securities and are very highly regulated.
Among money market funds, the one with the least risk but lowest yield invests in short-term Treasury securities.
Next in terms of both risk and yield would be prime money market funds, which invest in commercial paper issued by banks and corporations.
And the third type are tax-aware market funds that invest in municipalities’ debt and offer yield with potential tax advantages. For people in the highest tax brackets, municipal money market funds may be a viable option.
3. Can tie cash up for nine or more months—Individuals who can take more risk for the potential of more reward can invest in a mutual fund3 that makes slightly longer-duration investments than a money market fund.
Some mutual funds also invest in corporate securities and are taxable. Others invest in municipal bonds (“munis”), the debt securities offered by a state, country or municipality to fund their capital expenditures. Muni funds’ yields can offer tax advantages.
4. Are able to set aside cash for 12 to 24 months—Individuals may want to choose separately managed accounts (SMAs)4. With these accounts, investors directly own a collection of assets, including underlying assets like Treasuries, munis or corporate bonds.
Cash: The bottom line
In uncertain times, it’s natural for many people to hold on to more cash than they need. But when inflation hits and rates rise, that strategy can be counterproductive. To create a back-up plan, certain investors may establish a Portfolio Line of Credit (PLC)5. They may never need to use the PLC, but if they ever need or want to make large purchases or pay unexpected large expenses, they can access the necessary funds through their PLC—without having to keep large cash reserves idle or sell the carefully selected assets in their portfolios.
While we’ve offered some ideas that are intended to be educational, and should not be relied upon in isolation to make a financial decision, your J.P. Morgan team can provide personalized guidance and help you create an approach that could make sense for you.
*INVESTMENTS INVOLVE RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. Yields are indicative, subject to change and are not guaranteed. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax and other professionals that take into account all of the particular facts and circumstances of an investor's own situation. Read “KEY RISKS” below.
1 Bank deposit accounts, such as checking, savings and bank lending, may be subject to approval. Deposit products and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Early withdrawal penalties apply. For more details on the terms and conditions that govern the Certificates of Deposit, please refer to the Combined Terms and Conditions or the International General Terms for Accounts and Services Account Agreement, as applicable (the “Terms”).
2 MONEY MARKET FUNDS: You could lose money by investing in the Fund. Although Stable NAV Funds seek to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
Investors should carefully consider the investment objectives and risk as well as charges and expenses of the Fund before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing.
Funds that invests primarily in bonds, are subject to interest rate risks. Bond prices generally fall when interest rates rise. For some investors, income may be subject to the Alternative Minimum Tax. Income from investments in municipal securities is exempt from federal income tax. The risk of a municipal obligation generally depends on the financial and credit status of the issuer. For some investors, income may be subject to the Alternative Minimum Tax. Capital gains, if any, are federally taxable. Income may be subject to state and local taxes.
3 MUTUAL FUNDS: Investors should carefully consider the investment objectives, risks, charges and expenses of the mutual funds before investing. The prospectus contains this and other information about the mutual fund and should be read carefully before investing.
Funds invested in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally drops. Income from investments in municipal securities is exempt from federal income tax. The risk of a municipal obligation generally depends on the financial and credit status of the issuer. For some investors, income may be subject to the Alternative Minimum Tax. Capital gains, if any, are federally taxable. Income may be subject to state and local taxes.
4 SEPARATELY MANAGED ACCOUNTS (SMA’s): An SMA is a portfolio of securities managed on a client’s behalf by a portfolio manager for a fee. The portfolio manager has discretion to implement the portfolio per the stated investment objectives of the SMA.
SMA’s are subject to market risks. Investment return and principal value will fluctuate so that when an account is liquidated, it may be worth more or less than the original value. There can be no guarantee the objectives will be met.
SMA’s that invests primarily in bonds, are subject to interest rate risks. Bond prices generally fall when interest rates rise. For some investors, income may be subject to the Alternative Minimum Tax. Capital gains, if any, are federally taxable. Income may be subject to state and local taxes.
5 PLC – Bank products and services are oﬀered by JPMorgan Chase Bank, N.A. and its aﬃliates.
Portfolio Lines of Credit are extended in J.P. Morgan’s discretion and J.P. Morgan has no commitment to make loans to you under a Portfolio Line of Credit. Any loan extended under a Portfolio Line of Credit is subject to credit approval by J.P. Morgan and, if approved, the terms and conditions contained in deﬁnitive loan documentation governing the line of credit.
A line of credit collateralized by the securities in your investment account(s) involves certain risks and may not be suitable for all borrowers. J.P. Morgan assigns values to these securities and, at any time and without notice to you, may increase or decrease these values or change the eligibility of these securities as collateral. A decline in the value of these securities collateralizing your portfolio line of credit (whether due to a market downturn, market volatility or otherwise) directly impacts the amount of credit available to you and may require you to provide additional collateral and/or pay down your line of credit in order to avoid the forced sale of these securities by J.P. Morgan. Please review these and other risks in more detail and/or in conversations with your advisor and make sure to read your line of credit documentation carefully so that you fully understand your obligations and the risks associated with this opportunity.