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Low-risk investments still offer good opportunities
With the financial scenario prevailing in today's world, investors who have invested the money in market funds, fixed rate annuities or even in deposit certificates are just looking to play a safe game. All they want is that the principal amount should be safe and they earn some interest on it.
Due to this negative feeling which came after the fall of reputed institutions at Wall Street's, many investors are moving away from the stock market. Now the question is that should we move out of the market or do we still have any other alternatives. Here are the few alternatives
Money-market mutual funds
Due to the fall of Lehman Brothers, the share price of the Reserve Primary Fund which is a money-market mutual fund fell even below $1. Due to this the investors lost some part of the principal which they had invested. Despite suffering some looses in mutual funds, they are still considered as safe as insured deposits. These mutual funds have a diversified portfolio and thus they are considered risk free. They invest in IOU's from big companies and in short term Treasury securities.
Also they are not insured by the Federal Deposit Insurance Corp. But due to the sudden panic, the Treasury Department started a program in which all the funds as on September 19 will be insured.
Now if we talk about future investments in money funds, the response of Karen Dolan who is director fund analysis for Morningstar is very encouraging. He said "The odds of running into trouble are extremely low."
Annuities
The ninth largest seller of annuities through banks and the largest fixed rate annuities issuer in U.S is AIG. People who have retirement savings with them are in a state of confusion after the $85 billion bailout plan.
The main problem of surrendering an annuity is that we have to incur heavy surrender charges. Marvin Feldman who is the president of the Life and Health Insurance Foundation for Education believes that the problem of AIG's is due to the risky investments made by its holding company.
AIG's insurance subsidiaries are "highly regulated and well-capitalized," he says.
He added that in case any insurance company fails, all the losses would be covered by state's guaranty association. But this depends on the top limit as ensured by your state. In some states it can be $100,000 in cash value for fixed annuities and withdrawal. But other consideration is that it does not cover any variable annuities.
So in case of variable annuities, a different protection for investors is available. As said by Feldman, most of these variable annuities offer sub accounts which is a choice of mutual funds. These are segregated accounts and it should be kept in mind that if any insurance company declares himself as bankrupt, creditors don't have any right to file any claim against that company.
Insured deposits
As per the FDIC, $100,000 insurance in individual accounts is provided. In case of joint accounts, up to $200,000 is provided and in this case each account holder has same withdrawal rights. If the senate approved financial bill becomes a law then this can increase to $250,000.
According to bankrate.com, some banks are even willing to offer 4.5 percent on one year CD so that they can attract some customer deposits and end the credit drying.
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