Short-term bond funds represent a viable alternative to money market mutual funds and their paltry yields.
While most money-market funds are yielding less than 0.1 percent, top short-term bond funds yield more than 2 percent.
That’s a huge difference, but it doesn’t come without risk. With a reputable money market fund, you’re almost guaranteed not to lose any of your principal.
Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.
But in a bond fund, you’re subject to both credit risk and interest-rate risk. Credit risk is the risk that your funds’ bond prices will fall because of doubts about the borrower’s finances.
Interest-rate risk is the risk that your funds’ bond prices will fall because interest rates are rising across the board. One nice feature of short-term funds is that they suffer less during periods of rising rates than their long-term brethren.
J. Michael Martin, chief investment officer of FAI Wealth Management, believes the higher return of bond funds is worth the risk. Top short-term funds offered a total return of more than 4 percent last year.
"It's a step up in price risk and interest-rate risk, but it's tolerable compared with a zero return," Martin told The Wall Street Journal. "Money markets don't pay."
Remember, though, that at some point, interest rates will rise. When they do, the value of bond funds will fall, even though the effect should be more muted for short-term funds.
Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.
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