We are considering buying a house in next 3 to 4 years. I am putting away my wife's salary into the savings for next 3 years until we come up with 30% money in the bank to take care of down payment, closing fees and etc. Now the question is if I want that money to make me money right now while sitting in the bank for next 3 years, what is the best option to do so. Should I invest that money in mutual funds account or should I put that money into something else considering it's very low risk and beneficial. Any thoughts?
Imagine if you had put your funds into a diversified equity mutual fund 2 weeks ago. You might have lost ~15-20% of the value of your downpayment savings.
In a scenario where you need funds on the short term [and 3 years is short term for these purposes], you want to take on as little risk as possible. That means a savings account, or some form of a guaranteed savings bond, depending on your jurisdiction. Earning nothing over 3 years doesn't sound too bad compared with losing 20%.
Well, the U.S. overnight bank rate is 1.25% but that rate is not currently available to investors in short-term government bonds and is not expected to survive much longer in special-rate bank deposits.
Since a fund or a savings account is required for on-going deposits, then the likely choices are a 2.2 year duration investment-grade corporate-bond fund, a 2.6 year duration TIP fund, and a 0.57 year duration high-yield bond fund.