The idea that stock mutual funds, and to a lesser extent, bond mutual funds, should be seen as long-term investments is one of the first lessons taught to novice investors. This means that you shouldn't put money in long-term bond funds or stock mutual funds if you could need it within the next three to five years. Some mutual funds, meanwhile, are suitable for investing in the short term. Find out what kinds of investments can yield a return on your money while keeping your principal relatively safe.
main points
- Three to five-year-old assets are used in short-term investing.
- The 1970s saw the introduction of short-term investments like money market funds, some of which are tax-exempt.
- An investor often receives their money back from ultra-short-term bond funds in less than a year.
- Over the previous three years, the average return on several short-term mutual funds has been 2%.
What Is Investing in the Short Term?
In short-term investing, an investment is made that can be quickly turned into cash, usually within three to five years. Many investors look for alternatives to a savings account or a certificate of deposit that offer better short-term returns (CD). The national average savings account interest rate for balances of $2,500 in mid-April 2021 was barely 0.06 percent. The Federal Deposit Insurance Corporation reported that the interest rate on a $10,000 12-month certificate of deposit is 0.14 percent (FDIC). A money market mutual fund is a typical holding area for short-term assets. Money market funds come in a variety of forms. By choosing to invest in high-quality bonds, short-term government bonds, tax-exempt municipal bonds, and corporate and bank assets, they often limit risk. Contacting a financial advisor might be a useful first step for developing a strategy that works for you if you are new to investing.The Best Mutual Funds for Investing in the Short Term
While certain bond funds offer higher rates and returns than money-market mutual funds or other short-term products, they also offer a relatively safe short-term investment. The types of funds that are effective for short-term investing are examined in more detail below.Money Market Investments
In the 1970s, money market funds were established. They were created to give investors the chance to buy a variety of securities that frequently offer greater returns than interest-bearing bank accounts. Retail investors are the target market for several money market funds. Institutional investors are the target market for funds with large minimum investments. Money market accounts that banks provide are not the same as money market funds. Money market funds are not covered by the FDIC's money market account insurance. Three categories can be used to categorize money market mutual funds:- The majority of their investments are made in reputable, short-term private debt instruments by prime money market funds.
- Government money market funds invest at least 99.5 percent of their assets in highly liquid assets such as cash and government securities.
- Money market funds that are exempt from taxes and only invest in securities issued by state and municipal governments.
Funds for ultra-short bonds
Investments made by ultra-short bond funds are made in fixed-income securities that mature in less than a year. These funds have a broad range of securities they can invest in, including corporate debt, government securities, and mortgage-backed securities. Investors need to be aware that CDs and money market funds are less risky than ultra-short bond products. Some funds in a Morningstar evaluation of ultra-short bond funds have a 12-month yield of more than 2% (as of May 2021).These consist of:- The three-year average return for BBH's Limited Duration Fund (BBBIX) is 3.2 percent. It makes investments in asset-backed securities and other fixed-income products. Additionally, it invests in notes and bonds issued by domestic and international businesses, the US government, government agencies, and issuers that are backed by the government. 3
- DoubleLine Low Duration Bond I (DBLSX): Over a three-year period, the fund's average yearly return was 2.81 percent. At least 80% of its net assets are typically held in bonds. However, the fund is permitted to invest up to 50% of its total assets in fixed income and other securities with credit ratings below investment grade or without a grade but with comparable credit quality. 4
- Low Duration William Blair, R6 (WBLJX) From 2018 to 2020, the investment returned an average of 2.50 percent per year.It primarily invests in investment-grade debt securities that have at least one nationally renowned rating agency rating in the top three categories. 5
Short-term bond funds
Short-term bond funds invest in highly liquid bonds with maturities of one to three years. These bonds can withstand volatile market conditions since they have a lower interest rate risk than bonds with longer terms. With short-term bond funds, however, you risk losing your initial investment. As of May 4, 2021, Morningstar has given the following short-term bond funds strong ratings: Admiral Shares of the Vanguard Short-Term Corporate Bond Index Fund (VSCSX): The average annual return on this investment over the past three years, before taxes, was 4.30 percent. The product uses an indexing investment strategy to follow the Bloomberg US 1-5 Year Corporate Bond Index's performance. This index consists of securities with one-to five-year maturities that were issued by industrial, utility, and financial organizations. PGIM Class Z, Short-Term Corporate Bond Fund: Additionally, this fund's three-year average annual return before taxes was 4.30 percent. The fund typically places at least 80% of its assets in corporate bonds. All fixed-income securities, excluding preferred stock, are referred to as bonds. The portfolio of the fund typically has an effective time frame of fewer than three years. The Institutional Class of the Baird Short-Term Bond Fund (BSBIX): 3.52 percent before taxes was the average yearly return over the past three years for the fund. It invests at least 80% of its net assets in both domestic and international companies. It exclusively invests in debt obligations that at least one major rating agency has classified as investment grade at the time of purchase or, if unrated, that the advisor determines to be investment grade. The material is being provided without taking into account any specific investor's investing goals, risk tolerance, or financial situation. Therefore, it might not be appropriate for all investors. Future outcomes cannot be predicted based on past performance. Risks associated with investing include the potential loss of an investment.