Is an Income Mutual Fund a good alternative to a savings account?

Question

From what I've seen Income Mutual Funds, particularly an Index Income Fund, are relatively safe with a return greater than any 'guaranteed' return investment option. Obviously the actual return is dependent on the fund, but I'm just speaking generally.

If I still kept about 3-6 month's worth of salary in an actual savings account, would it be a good alternative to put the rest of my savings into an Index Income Fund, or is the risk of losing that money too great to be still considered safe enough to be my "savings"?

If this is considered too opinion based I guess the underlying question could be how risky, in general, are Index Income Funds.

EDIT: Risk being fluctuation of the fund within a given year

Answer 1

The value will certainly fluctuate up and down (but on average gain more than a savings account), but so long as you have enough liquid assets for emergencies, then yes, it's a perfectly good alternative to savings accounts.

how risky, in general, are Index Income Funds.

How are you defining "risk"? If you mean "probability that I'll lose it all" then it's virtually zero. If you mean "how much the value can fluctuate" then it's certainly not risk-free, but it has less volatility that individual stocks. If you take the S&P 500 as a proxy, you might expect the change in value over any given year to fluctuate between -30% (like 2008) and +40%, with an average change of around 8%.

There will be funds that have less volatility, but produce less return, and funds that have more volatility but higher average returns.

Answer 2

Risk. Volatility. Liquidity. Etc. All exist on a spectrum, these are all comparative measures. To the general question, is a mutual fund a good alternative to a savings account? No, but that doesn't mean it is a bad idea for your to allocate some of your assets in to one right now.

Mutual funds, even low volatility stock/bond blended mutual funds with low fees still experience some volatility which is infinitely more volatility than a savings account. The point of a savings account is knowing for certain that your money will be there. Certainty lets you plan.

Very simplistically, you want to set yourself up with a checking account, a savings account, then investments. This is really about near term planning. You need to buy lunch today, you need to pay your electricity bill today etc, that's checking account activity. You want to sock away money for a vacation, you have an unexpected car repair, these are savings account activities. This is your foundation. How much of a foundation you need will scale with your income and spending.

Beyond your basic financial foundation you invest. What you invest in will depend on your willingness to pay attention and learn, and your general risk tolerance. Sure, in this day and age, it is easy to get money back out of an investment account, but you don't want to get in the habit of taping investments for every little thing.

• Checking: No volatility, completely liquid, no risk

• Savings: No volatility, very liquid, no principal risk

• Investments: (Pick your poison)

The point is you carefully arrange your near term foundation so you can push up the risk and volatility in your investment endeavors. Your savings account might be spread between a vanilla savings account and some CDs or a money market fund, but never stock (including ETF/Mutual Funds and blended Stock/Bond funds).

Should you move your savings account to this mutual fund, no. Should you maybe look at your finances and allocate some of your assets to this mutual fund, sure. Just look at where you stand once a year and adjust your checking and savings to your existing spending. Savings accounts aren't sexy and the yields are awful at the moment but that doesn't mean you go chasing yield. The idea is you want to insulate your investing from your day to day life so you can make unemotional deliberate investment decisions.