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