When investing, balancing risk is very crucial. As a result, fixed income is a valid portion of an investment strategy. This raises the question: CD (Certificate of Deposit), MMs (Money Markets), or Treasuries? This is a surface level analysis of the tradeoffs between each and the circumstances for which each is most appropriate.
Firstly, CDs are a very common investment vehicle that has the sole purpose of depositing income into a bank for a single fixed gain at the end of the time period. More simply, when purchasing a CD, an investor gives a certain institution their money with the trust that the bank will eventually pay them back the capital and some for a fixed financial gain. This is very different from MMs but similar to treasuries except that with a CD, an investor places more trust in an individual bank rather than a country/government. CDs are very helpful and applicable when one has trust in an institution and is willing to risk more than a MM or Treasury to make a fixed profit.
In a similar vein, treasuries also offer a way of earning fixed income. However, the key distinction between CDs and treasuries is that one of them is believing in a company versus a government. If an investor analyzes a company and determines that they believe it is less risky than the public, they are able to capitalize on the heightened payout amount since CD yields are focused on risk level. For example, if a company is extremely stable they need to pay less to investors because the investors know that they are a safe investment and that the income is likely to be paid out. Conversely, in a speculative market, investors that believe in risky businesses can capitalize on it since they think that they know something about the business that others do not and can therefore earn through arbitrage.
Unlike the other two, MMS are extremely liquid. While the other investment options have specific maturity dates, MMs pay out periodically or upon liquidation which is during any trading day. Better yet, it is possible to structure a brokerage account in a way that investment purchases pull capital from a MM. What this means is that all cash is held in a passive investment vehicle that pays out interest that is very flexible. At any moment when an investor purchases a stock, the capital is pulled out of the MM and transferred into the stock. This allows for balanced investing where cash is never simply depreciating; it is always staying roughly in line with inflation and the market. That being said, MMs have a lesser payout percentage. If an investor is planning on staying invested in fixed income, CDs or Treasuries are much more beneficial as they have higher interest dividends.
In essence, there are a wide variety of fixed income investment vehicles that work in many different ways. While this research places focus on CDs, MMs, and Treasuries, there are also bonds, saving accounts, and other mediums of investing with the purpose of passive appreciation. Each investment type has advantages and disadvantages but overall CDs and Treasuries are preferred for long-term assets with the final decision being placed on where an individual places trust. Furthermore, MMs are more practical for those who are unsure of what their goals are and who cannot dedicate a fixed amount of money to be kept by an institution for long periods of time. Overall, there are a variety of ways to help hedge portfolios and make educated investment decisions and including a fixed investment vehicle is one of the smartest diversification mediums.