Suggestions for minimum risk short term assets

[helpvictor]

Hello Desi, Reading all your replies and to me you sound like a real financial guru...Well here is one more silly question. I have fairly good amount of cash sitting in US bank (in CD which are all maturing on next 3 months). Th edollar is weaking and cd rates are falling in US as well as India. Where should I pu this cash, with minimum risk and good return in near term (1-2 years). I have looked at icici nro accounts, US banks etc... thanks in advance

[Desi]

1. Bank CDs, they offer a FDIC insurance of 100K but the best you can get is in the 3.5% range. Does not beat inflation.

2. Bank MMAs offer somewhat higher rates but have some restrictions. (bankrate.com is a good source of the rates)

3. Safest are the US treasury bonds, but rates suck.

4. Money Market funds are pretty safe and Vanguard Prime Money market yields very close to 4%. The rate is going to vary however over time, so there is the interest rate risk.

5. Commercial paper, however I have not checked rates and has some small risk, duration is 7 days on this one.

6. Indian bank FCNR cannot compete to above and NRE carries currency risk and exchange conversion loss.

7. US treasury bond rates suck - http://www.bloomberg.com/markets/rates/

8. Short term corporates look good VFSTX, yield close to 4.8%

9. Short term govt bond fund looks good - SHY, yield 4.2%

All of the above mentioned range from no risk to low risk.

I have not mentioned any higher risk options.

I am not suggesting any ladders here considering the duration you have suggested. Considering the interest rate climate, I would pick VFSTX if I am willing to tolerate some risk. Pick money market fund if very very low risk.
Pick bank CDs if you are looking for no risk upto 100K and treasury notes for absolutely no risk.

Muni bonds, inflation indexed are intentionally not suggested.
Ginnae Maes for those willing to take some measured risk in NAV fluctuation. They carry interest rate risk. The bonds in there are guaranteed by the US govt. Here you can look at current yield in the range of 5% and NAV fluctuation over 10 years. http://finance.yahoo.com/q/bc?s=VFIIX&t=5y . Current interest rate climate bodes well for this. Lastly based on the amount you can even pick multiple options.

All of the above has ignored the inflation risk.

I would also suggest to seek input from other members ( I am by no stretch of imagination a "guru").

[SubtleFriend]

Etrade savings account gives 4.1% currently with no minimums and no fees, and is FDIC insured up to $100K. Their CDs offer at best 3.40%. The savings account interest rates can change any time, but still 4.1% seems good to me given that it is FDIC insured.

[returnindia123]

1. Bank CDs, they offer a FDIC insurance of 100K but the best you can get is in the 3.5% range. Does not beat inflation.

2. Bank MMAs offer somewhat higher rates but have some restrictions. (bankrate.com is a good source of the rates)

3. Safest are the US treasury bonds, but rates suck.

4. Money Market funds are pretty safe and Vanguard Prime Money market yields very close to 4%. The rate is going to vary however over time, so there is the interest rate risk.

5. Commercial paper, however I have not checked rates and has some small risk, duration is 7 days on this one.

6. Indian bank FCNR cannot compete to above and NRE carries currency risk and exchange conversion loss.

7. US treasury bond rates suck - http://www.bloomberg.com/markets/rates/

8. Short term corporates look good VFSTX, yield close to 4.8%

9. Short term govt bond fund looks good - SHY, yield 4.2%

All of the above mentioned range from no risk to low risk.

I have not mentioned any higher risk options.

I am not suggesting any ladders here considering the duration you have suggested. Considering the interest rate climate, I would pick VFSTX if I am willing to tolerate some risk. Pick money market fund if very very low risk.
Pick bank CDs if you are looking for no risk upto 100K and treasury notes for absolutely no risk.

Muni bonds, inflation indexed are intentionally not suggested.
Ginnae Maes for those willing to take some measured risk in NAV fluctuation. They carry interest rate risk. The bonds in there are guaranteed by the US govt. Here you can look at current yield in the range of 5% and NAV fluctuation over 10 years. http://finance.yahoo.com/q/bc?s=VFIIX&t=5y . Current interest rate climate bodes well for this. Lastly based on the amount you can even pick multiple options.

All of the above has ignored the inflation risk.

I would also suggest to seek input from other members ( I am by no stretch of imagination a "guru").[/quote]

I (USC) am moving to India this May'08. Where should I park short term funds? I plan to use these funds for buying a home in the next 6-18 months in India. Keeping in perspective US/India tax consequences, since I will be moving to India in May'08 and I will not be earning any income (in US or India) before December 2008. Would the strategy be the same as you have mentioned?

[gurusw]

Muni bonds, inflation indexed are intentionally not suggested.
[/quote]

May I ask why? Looks like these two are most touted on various financial websites these days.

[Desi]

May I ask why? Looks like these two are most touted on various financial websites these days.[/quote]This is what member helpvictor said: Where should I pu this cash, with minimum risk and good return in near term (1-2 years).

This would mean seeking some bond funds with very low duration to minimze risk due to interest rate sensitivity if bond funds is the choice he goes for. Even those will have NAV fluctuation and hence there is risk. He has just said "minimum risk" but not been more specific.

The muni funds that one looks for in such cases would be those with very short durations (if one can find those). Considering how the insured Munis have been beaten, I am not comfortable in holding muni funds when the duration of holding is only one to 2 years. And for inflation indexed because of the volatility, once again I feel uncomfortable in recommending those for this short duration when it is being coupled with a requirement of "minimum risk". My focus is not chasing return but minimizing risk.

The following article at the link thinks munis may be a good deal, but also read how much they have been beaten and that beating is a risk which does not disappear just because they have been beaten once. Right now the insurers themselves are hurting.

Lastly, just a note that anyone considering Munis has to compare the net yields - dividends from munis are exempt of Federal tax and may be exempt from state and city taxes based on which munis they are. At present time, the yield of munis is not much significantly higher than comparable treasuries, so the entire benefit is yielded from the tax benefit. So one needs to compare that to corresponding yield from money market, and other bank accounts and measure that difference against risk. At this point treasury fund such as SHY is yielding over 4% and VFSTX at 4.7% or more (pretax).

http://www.kiplinger.com/magazine/archives/2008/02/insured_munis.html

[Desi]

I (USC) am moving to India this May'08. Where should I park short term funds? I plan to use these funds for buying a home in the next 6-18 months in India. Keeping in perspective US/India tax consequences, since I will be moving to India in May'08 and I will not be earning any income (in US or India) before December 2008. Would the strategy be the same as you have mentioned?[/quote]
Will you have RNOR status in India?
Do you have GC or USC?
What is your USC status as far as immigration is concerned?
How much money are we talking about? While you may not have any other income, the interest earned on this money will be income that may be subject to tax, so it is important to understand the amount.

The above information will help.