What's Insured and What's Not
Deposits vs. Investments
Any money you have in savings and checking accounts or in certificates
of deposit (CDs) is known as a deposit. Your financial institution is
committed to returning all of your deposits (plus interest) whenever you
ask. You can even take money out of a CD before it matures, however, you
will have to pay a penalty for early withdrawal.
Your institution is also required to carry government insurance on your
deposits up to $250,000. The insurer is usually the Federal Deposit Insurance
Corporation (FDIC). Contact your financial institution if you have specific
questions about your insured deposits.
Financial institutions can also provide investment products like mutual
funds and annuities to their customers. Your bank or credit union may
sell you this type of product, but it is not obligated to pay you back
for any losses you may have if the investment is not successful.
Market Deposit Accounts (MMDAs)
of Deposits (CDs)
Equally important, the U.S. government does not insure you against investment
losses, even if you purchased the product at a bank or credit union.
Investing in a Mutual Fund
When you invest in a mutual fund, your money is put together with the
money of other investors and is used to purchase a variety of securities
such as stocks, bonds, and other financial instruments.
Mutual funds are run by investment professionals who decide which investments
to buy or sell for the fund. Their decisions are guided by the fund's
For example, some mutual funds are designed for people who want to have
easy access to their money and invest only for a short time. These funds
invest primarily in government securities or very short-term bank CDs,
where the investment risks are moderate.
Other mutual funds appeal to people who are willing to take on more risk
with the goal of a higher return. Such funds invest primarily in corporate
or municipal bonds.
Most mutual funds, however, are more diverse, offering a mix of investments.
A typical fund portfolio includes between 30 and 300 different stocks,
bonds, and other instruments.
Under the law, any institution selling you shares in a
mutual fund or annuity must inform you that:
- Mutual funds and annuities are not insured by the Federal
Deposit Insurance Corporation (FDIC) or guaranteed by the
bank or credit union that sells them.
- Mutual funds and annuities involve an investment risk,
including the possibility of lost principal.
Federal regulations also require that:
- Your bank or credit union must tell you if it serves the
fund in an advisory capacity.
- Banks that sell mutual funds or annuities must clearly
distinguish between regular bank teller windows and mutual
fund or annuity sales windows.
- Employees who accept regular deposits are not allowed
to offer investment advice.
Investing in an Annuity
When you buy an annuity, the bank or insurance company invests your money
and agrees to pay you back according to the annuity's contract terms.
The annuity can be part of a long-term savings plan for retirement. Like
mutual funds, they are not insured by the U.S. government or by the bank
where you buy them.
Some annuities help you set aside money on a tax-deferred basis. You
don't pay taxes on the income earned by this money until you retire. Other
annuities allow you to receive income immediately. However, the amount
of income you will receive can go up or down with changes in financial
markets and the income won't be tax deferred.
With annuities, the annuity contract spells out the terms of your agreement.
It will tell you whether or not you can transfer your contract to another
company. Also, surrender charges or penalties apply when funds are withdrawn
before a designated period of time has passed. Surrender charges can apply
from five to ten years or more. You may want to consider meeting with
a qualified tax advisor or financial planner to learn more about annuities.
Buying through Your Institution
be aware that
every product sold
by a bank or credit union
is not automatically insured
by the U.S. government.
Not all banks and credit unions sell investment products, but many do.
Some simply rent lobby space to outside companies. Other institutions
sell what are called proprietary funds, which are sponsored by an outside
company but receive investment advice from the institution itself. Private
label funds, meanwhile, are sponsored and managed through an outside company
but are only sold through one bank or credit union.
Some mutual funds and annuities have names that sound very much like
names of financial institutions. But no mutual funds or annuities are
insured by either your institution or the U.S. government. As an investor,
you should be aware that these funds have different degrees of risk and
could possibly lead to a loss of some or all of your principal.
For More Information
The Federal Reserve Bank of San Francisco has several other consumer
brochures. These brochures are posted on our web site at: http://www.frbsf.org/publications/consumer.
Learn about . . .
The Consumer Information Center provides hundreds of federal consumer
publications, including Deposits and Investments: There's A Critical
Difference, prepared by the Comptroller of the Currency, and Staying Independent: Planning for Financial Independence in Later
Life. To order these titles or request a Consumer Information
Consumer Information Center
Pueblo, CO 81009
For information on mutual funds, contact the Investment Company
Institute. They also publish a Directory of Mutual Funds that lists general information about mutual funds.
Investment Company Institute
P.O. Box 66140
Washington, D.C. 20035-6140
For information on annuity investments, contact the National Association
for Variable Annuities (NAVA).
National Association for Variable Annuities
11710 Plaza America Drive, Suite 100
Reston, VA 20190
This overview was based on materials originally
created by the Federal Reserve Bank of Philadelphia.