Ultra short bond funds vs money market funds

Here is a closer look at two places to put your cash until the economic turmoil is a bit less cloudy. Both seem the same at the surface, but there are key differences. Happy Investing






First of all, what is an ultra short bond fund? It is basically just what is sounds like. It is a fund of bonds not usually over a year long. They bonds they invest in could be government, mortgage backed, and corporate bonds, and other asset backed securities. They can buy new short term securities like a 90 day treasury bill, or a one year note, or even a thirty year corporate bond that only has nine months left till it matures. Because they can buy bonds on the secondary market, they have quite a wide range of options available to them. The NAV (Net Asset Value) of these funds is pretty stable due to the short maturities of the bonds in the portfolio.


What is a money market fund? Money market funds are mutual funds that are required by law to only invest in ultra safe securities. A lot of brokerages have their own money market funds and most mutual funds have their own money market funds. The returns on money market funds today are dreadful. Some time ago my company had the highest money market rate on the street and it was a great tool to attract new assets. I believe around 1998 the money fund rose to just over 6% which sounds remarkable by today's standards. Money market funds are not checking accounts nor should they be used like one. Generally one gets three checks a month, and many times there is a minimum limit that the check can be written for. What that limit is I have forgotten. Some firms would let you write more checks you had to pay a couple of dollars for each additional check used.


Money market funds typically invest in commercial paper, government securities, certificates of deposit, repurchase agreements, other money funds, or other low risk securities that are highly liquid.


After reading this you are probably thinking that there is no difference between the two, but there is. Both invest in short term investments and neither of them are insured or guaranteed by the FDIC or any governmental agencies.


Money market funds are regulated by the Securities and Exchange Commission and the investments are restricted by quality, maturity and diversity. They can only invest in high grade short term investments issued by governments and corporations. Ultra short bond funds are not hampered by those restrictions so they usually go for a bit higher risk investments that will give them better yield. Money market funds try to keep their NAV and 1.00 a share and that value almost never decreases. In all the time I was a stockbroker I never heard of one losing value. The Ultra Short Bond fund may also have a NAV at 1.00 but there's will fluctuate.


The strict maturity and diversification requirements on the money market fund are not present on the ultra short bond fund. Make sure to talk to an investment advisor to find out which product is better for your current situation.


Happy Investing

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