We have our emergency funds covered and we are looking to put aside some extra cash on a periodic basis for things like vacations, holiday shopping, and such. Instead of putting it into a low interest rate savings account, I was thinking of a low-risk, low-fee mutual fund like a TIPS fund. I figure we can accept a small amount of risk so we can get some return.
Christopher, Before you invest anything for "fun savings," you first need to determine when you will need the money you're investing, how much of a return you'll want or need from your investment(s), and how much risk you are willing to take. Once you've determined the answers to those critical questions, then you can begin looking at potential investment options.
I am a firm believer that money you will need within the next one to three years should not be invested in the financial markets and are better off in guaranteed instruments like CDs and money market funds. Sure, you might make more money in a stock or bond mutual fund. But you might also lose money. As Joe Day wrote in his answer, "most investing involves some amount of risk," and I would advise risking money you will need in the next few years... unless you are willing to risk losing money and having to put off your vacations or holiday shopping. Suppose you had invested 1,000 in a TIPs fund (which is not as low-risk as you might imagine) on January 1, 2013. If that fund was the Pimco Real Return Fund or American Century Inflation Adjusted Bond Fund, you would have lost over 9% last year and your $1,000 would be worth $900--so much for "low risk." Having lost $100, how would that affect your holiday shopping or vacation plans? Even in a shorter duration TIPS fund, you would have lost money in 2013.
Investing is not as simple as the media might make you believe. And for every great investment your friends might tell you about, there's a bad investment they're never mention. You have to know your investment time horizon, risk tolerance and return objectives and then do your homework to find an appropriate investment strategy and investments. Considering your objective, I would recommend you read a good book on personal finance that will show you how to incorporate your investment strategy with your financial goals and situation. Ric Edelman's The Truth About Money is a pretty good book, as well as his Lies About Money book. Both will give you ideas on how to invest money for your "fun savings." You might also want to consult with a financial advisor. Paying for an hour of his or her time might be all you need to come up with a rudimentary investment plan and avoid making any mistakes with your hard earned money. Let me know if you have any follow up questions.
Chris, most investing involve some amount of risk. Even a TIPS fund contains risk. While it may be a good long-term inflation hedge, the duration of the fund can subject your savings to interest rate risk. If interest rates rise, you could see the value of your "fun" savings decline, and maybe more than you expect. A shorter-duration TIPS fund, may be more appropriate, but again, contains some risk.
A critical question is how long you think the funds will stay invested and if you are comfortable with the investment losing principal (even if its not a significant amount of principle) should you choose to pull the money out for a vacation, etc. If you are confident the funds will be used in the short-term, then it may be better to stick with a cash/money-market option. However, if you are okay with some principal risk, then a conservative fund may work for you.
If you do find a suitable conservative fund, be sure to make sure the fees to get in and out of the fund are minimal. Preferably a no-load fund with no redemption charges. And loads or redemption charges, especially for short-term investments, can have a significant impact on the value of your investments.
Hi Chris! I have to agree with Rich's take on your savings. Risk and inflation can eat away even at bond funds leaving you with less than what you started with. I'm a fan of earmarking funds for specific goals, but sometimes you may find yourself with a bucket of money that is just there and serves no particular need or time frame. If your funds don't have a specific goal or time frame for use, and you think it may be a while before you need it, you may want to consider investing in a more balanced fund rather than one that invests in only TIPS.
Yes Chris, that's fine if you already got your emergency funds covered. Stick with no-load index funds or ETF's. You can construct a custom ETF portfolio on Blackrock iShares website. iShares trade at no cost in a Fidelity Brokerage account which you can open free at Fidelity Investments website.