A client has come to you inquiring about establishing a contingency fund for eme

Question

A client has come to you inquiring about establishing a contingency fund for emergency purposes. She tells you that safety of principal is very important but so, too, is the possibility of a higher relative return and immediate liquidity. Which of these investments do you recommend and why?

A. A money market mutual fund, because it provides federally insured, safe, liquid funds

B. A 1-year certificate of deposit, because it may be redeemed without penalty at any time

C. A money market deposit account, because it provides a high rate of return with easy access to principal

D. A guaranteed investment contract (GIC), because it has a maturity of less than 1 year and offers a guaranteed high interest rate

Explanation / Answer

Option C

Since the investor wants a safe, relatively high return and immediate liquidity, they should go with money market deposit account. It has higher return as compared with other investment avenues and the amount of principal can be withdrawn at any time.

Other avenues are either less liquid or providing lower rate of return.

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