Bond funds and online high yield savings accounts might appeal to you if you are seeking supplemental income. While both may provide you with monthly interest payments, there are substantial differences between these investments. These include the risk factors, investment yield and liquidity levels.
Bond funds are mutual funds that contain thousands of debt securities. These include government and corporate bonds and mortgage backed securities. The share price of a bond fund is driven by the market value of the underlying bonds. There are no principal guarantees with a bond fund, although shares in these funds are typically less volatile than stock funds. In contrast, high yield online savings accounts are not subject to principal fluctuations. These accounts work similarly to money market bank accounts, except for the fact that you cannot typically make in-bank withdrawals when you have an online account.
Many investment companies and brokerage firms are members of the Securities Investor Protection Corporation. This member-owned entity insures securities accounts for up to $250,000 per account holder per investment firm. If your brokerage firm goes bankrupt, the SIPC covers some of your losses. However, the SIPC does not cover losses tied to funds actually losing value. The Federal Deposit Insurance Corporation insures online savings accounts. This government agency covers your losses for up to $250,000 if the bank holding your account becomes insolvent.
You can sell shares in a bond fund at any time, but sale orders are not processed until the end of the business day. Shares are sold based on the market value of the shares, and you generally receive your cash within a few days of the sale. Online high yield savings accounts are also highly liquid although you can only make up to six withdrawals using online banking portals, transfers or checks per month. You can make unlimited withdrawals from automated-teller-machines but some banks do not provide ATM cards for online accounts.
It costs less for a bank to operate an online account than a standard savings account because you have no access to branch personnel, which allows banks to cut staff and other costs. Some of these savings are passed onto you in the form of higher interest payments. Online high yield savings accounts often yield similar returns to bond funds that hold federal bonds and low risk corporate bonds. However, you can potentially earn more if you invest in bond funds holding higher risk mortgage backed securities or corporate bonds. Additionally, returns on some municipal bonds funds are tax-free, while interest payments on online savings accounts are fully taxable.
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