Best Short Term Bond Mutual Funds: Investment Strategy

When investors are afraid about interest rate hikes, they should look into shorter term to intermediate term bonds. Short-term bonds invest mainly in investment-grade securities of government, corporate and other U.S. fixed-incomes. These bonds usually have duration of 1 to 3.5 years (or, if duration is not available, the average effective maturities of the bonds will be 1 to 4 years). These bonds are attractive to fairly conservative investors, because they are less sensitive to interest rates than portfolios with longer duration.

These shorter term bonds can protect investor from Armageddon of losing their investment bond value. Typically, bond value is moving different direction from its yield (i.e. when yield is increasing, the bond value will decrease, and vice versa). This means bond value will decrease during the interest rate hikes condition.

There are 4 ways to invest in these short term bonds:

1. Individual bonds – investor can choose an attractive individual bond for their accounts (taxable or tax deferred account)
2. Mutual Funds – mutual fund can provide variety of short term bonds selection for asset diversification. This article will focus on short term bond funds.
3. Exchange Traded Funds (ETFs) – low fee and diversification has made ETF as the first choice for investors
4. Closed End Funds (CEFs) – Although they are not popular among investors, bond CEFs can provide an attractive choice to investors

Top Short Term Bond Mutual Funds

Reasons to invest in short term bond funds are:

• Investors can preserve the principal and earning interest for income
• You can manage interest rate risks
• Enhance your investment portfolio and compliment your stock investment
• To diversify risk by investing in bond mutual funds (fixed income funds)

Note: It is probably better idea to have bond investment in tax deferred account (i.e. Retirement account such as IRA, 401k) than in taxable accounts (i.e. regular brokerage account). Please consult your tax advisor for details.

The best short term bond mutual funds are:

1. Thompson Plumb Bond (THOPX)
2. Homestead Short-Term Bond (HOSBX)
3. Vanguard Short-Term Bond Index Inv (VBISX)
4. USAA Short-Term Bond (USSBX)
5. PIMCO Low Duration A (PTLAX)
6. Lord Abbett Short Duration Income A (LALDX)

Investment Risks of Short Term Bond funds

Investing Risks include credit risk, liquidity risk, foreign investing risk, prepayment risk and extension risk, derivatives risk, other risks. Please check fund prospectus for any additional risks.

How can you buy these funds?

You can check some of the brokerages I listed above or check one of the following brokerage accounts:

• Fidelity – Fidelity offers lots of NTF mutual funds and there are 30 ishares ETFs for free trade. It also offers cash management banking such as rewards credit card, checking, etc
• Vanguard – Vanguard offers various mutual funds such as index funds or actively managed funds. It also has one of the most complete ETFs selections.
• Scottrade – Offers various mutual funds. 3,000 No load & No Transaction Fees (NTF) fund for free. You can also trade 15,000 mutual funds for $7.00 per trade.
• T. Rowe Price – only offer their TRP fund & famous for 401k administrator for most public or private companies.