In today’s economic environment of high interest rates and elevated inflation, many conservative savers are wondering how to best maximize their liquidity. Traditional options such as public debt, money market funds, and foreign deposits are typically recommended. In this article, we will thoroughly analyze the advantages and disadvantages of each to help you make an informed decision.
1. Public Debt: Safety and Risks
Public debt is undoubtedly the safest asset within a country. This is because governments have the ability to generate tax revenue to repay debt. However, there are risks involved: although real interest rates have been positive in the short term, if these do not exceed inflation, the purchasing power of your investment may be eroded. Additionally, while default by European states is unlikely in the short term, some countries have historically opted for debt defaults.
Investing in public debt is also subject to tax withholdings. In many countries, the interest from bonds and obligations is taxed at a 19% rate. This rate may be higher if the public debt is from foreign countries without a double taxation treaty in place.
Pros:
Highly secure with minimal risk of default in the short term.
Easily tradable, allowing for quick capital recovery if needed.
Cons:
Lower returns compared to other options such as money market funds or foreign deposits.
Subject to tax withholdings, which vary depending on the country and investment type.
2. Money Market Funds: Stable Returns and Low Risk
Money market funds are investment funds that focus on very short-term, low-risk financial assets, such as Treasury bills or other safe private sector assets. The main advantage is that, while their average returns may be higher than those of public debt, the risk remains very low. Additionally, these funds can be liquidated with minimal penalties, providing flexibility to access liquidity at any time.
Another advantage is that reinvested gains within the fund are not subject to withholding taxes, allowing for greater capital accumulation. However, if you decide to redeem your investment, taxes will apply at the time of liquidation.
Pros:
Higher average returns compared to public debt.
Very low risk and volatility.
No withholding taxes on reinvested gains.
Cons:
Possible need to fill out the form 720 for foreign money market funds, adding administrative costs and risks.
Although the risk is low, it is slightly higher compared to public debt.
3. Foreign Deposits: Combining Benefits of Public Debt and Money Market Funds
Foreign deposits offer a mix of the advantages of public debt and money market funds. On one hand, they may provide higher returns than domestic public debt since foreign banks invest in private debt that offers higher interest rates. On the other hand, these deposits are protected by deposit guarantee funds, reducing the risk of bank insolvency.
Foreign deposits also face similar tax issues and, if assets exceed a certain threshold, there may be a need to declare these deposits.
Pros:
Potentially higher returns compared to domestic public debt.
Protected against bank insolvency risks through deposit guarantee schemes.
Cons:
Tax withholdings and possible requirement to declare assets if the threshold is exceeded.
Conclusion: Which Option Is Best for the Conservative Investor?
Each of these options has its own set of pros and cons. Public debt is safe but comes with limited returns and high taxes. Money market funds offer higher returns but come with slightly more risk and administrative costs. Foreign deposits, on the other hand, may provide an attractive combination of higher returns and security, but they also have some additional tax requirements.
If you have liquidity at low yields and are seeking to protect your capital in the current environment of high interest rates and inflation, any of these options could be suitable. However, it’s important to consider your risk profile and the specific tax rules of your country before making a decision.
In future articles, we will explore whether it’s truly the right time to invest or if it’s better to wait until interest rates stabilize for maximizing returns.
Disclaimer: The content of this article is for informational purposes only and does not constitute financial advice, investment recommendations, or a suggestion to buy or sell assets. Cryptocurrencies and digital assets are highly volatile and may involve significant risks. Always conduct your own research (DYOR) and consult with a professional financial advisor before making investment decisions. The author and the website are not responsible for any loss or damage that may arise from investments based on the information provided.
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