Whether it’s declining interest rates, elevated market volatility, or a combination of both, investors may be wondering how they can grow their portfolios without putting their financial future at risk. That has led to a demand for certain investments that have the potential to deliver both growth and capital security. A somewhat lesser-known financial option of market-linked growth certificates of deposit may be something to consider.
What is a market-linked growth CD?
A MLCD is a specific type of note that is organized by a bank and is tied to a certain underlier (usually the S&P 500). MLCDs offer a return based on a collection of stocks or a market index. Basically, when the market is doing well, so is the MLCD. The opposite is also true when the market drops. But if you hold the MLCD until its maturity date, your principal is guaranteed – even in the event of a market downturn. The principal amount in a MLCD is insured by the FDIC (with few exceptions) up to a maximum of $250,000.
How is a market-linked growth CD different from a regular CD?
Regular CDs grow your money according to a set interest rate at the time of opening the account, which remains the same throughout its term. MLCDs, however, depend on a market index, so its performance adjusts according to any changes in the market. With a regular CD, a bank would say they’re going to guarantee you a set percentage every year for five years. A MLCD, on the other hand, doesn’t guarantee any yield.
Let’s say the S&P 500 has a total return of 10% over the 60-month period of the MLCD. The multiplier attached says whatever the total return, we’ll multiply it by five times. If the index goes up 20%, that means your total return is 100% over 5 years (e.g., turning $10,000 into $20,000 with FDIC insurance). During that time, the worst thing you’re going to get is zero rate of return due to the FDIC insurance. It cannot go down in value. Additionally, the term length for MLCDs is usually much longer than regular CDs, with periods ranging over several years rather than months.
By Comparison:
| CDs | MLCDs |
|---|---|
| FDIC Insured | FDIC Insured |
| Fixed rate set at beginning of term | Rates based on market performance |
| Terms available in a few months to years. | Long-term investment with terms spanning years |
| Guaranteed rate of return | No guarantee on return |
| Relatively low yield upon maturity | Potentially high yield upon maturity |
What are the advantages of a market-linked growth CD?
MLCDs can offer investors several distinct advantages, including:
- Potential Growth – The underlier to which a MLCD is tied has the potential to provide greater returns above the fixed rates of regular CDs.
- Guaranteed Security – The principal (not the interest) of your MLCDs is protected and backed by the issuing bank when held to maturity. They’re also FDIC-insured up to $250,000. Even if the markets don’t perform, you don’t lose a dime.
- Portfolio Diversification – MLCDs can provide exposure to a variety of underlying markets, including domestic and foreign equities.
- Investor Convenience – Through a MLCD, investors can potentially achieve a number of investment goals such as growth, diversification, and security.
Why should I choose Miser Wealth Partners for my market-linked growth CD?
MLCDs are not as common as regular CDs, so not all investors are as familiar with them.
They are also a sophisticated product that require special knowledge and skill to help get the most out of your investment. Miser Wealth Partners has extensive knowledge of these types of investments in addition to having formed relationships with big-name banks around the country. What that means for you is that you can rest assured you’ve got a trusted partner who will go the extra mile in making sure you get the most bang for your buck.
What’s my next step to a market-linked growth CD in Tellico Village and East Tennessee?
Schedule your appointment with a Miser Wealth Partner to understand the risks and benefits of a MLCD. Although opening this type of investment might seem as easy as “1, 2, 3,” you should only purchase them if you understand and account for their drawbacks, which may include returns taxable as interest, capped upside potential, lack of dividends, and stock market risk.
Having a trusted partner with all the knowledge to guide you through this lesser-known product can make all the difference. Don’t go it alone. Contact Miser Wealth Partners today at (865) 281-1616 or click here to set up a time to talk with us.
