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Ultra-Short Bond Funds vs. Money Market Funds

What Is an Ultra-Short Bond Fund?

Ultra-short bond funds represent mutual funds, which invest in fixed income securities that have very short maturities, ideally around one year. Potential investments include government, mortgage-backed and corporate bonds, and other asset-backed securities. 

With their short average duration, ultra-short bond funds don't suffer much when interest rates rise.

What Is a Money Market Fund?

Money market funds represent mutual funds, which are required by law to choose low-risk securities to invest in. Eligible money market investments include commercial paper, government securities, certificates of deposit, repurchase agreements, other money funds, or other low-risk securities that are highly liquid.

Ultra-Short Bond Funds vs. Money Market Funds

Some investors don't quite realize the difference between the ultra-short bond funds and money market funds. Both invest in short-term investments and both are not guaranteed or insured by the FDIC or another government agency but there are some material differences between them.

Money market funds are regulated by the SEC and their investments are restricted by quality, maturity and diversity. They can invest only in certain high-quality, short-term investments that are issued by U.S. government and U.S. corporations.

Ultra-short bond funds, on the other hand, are not subject to such requirements and generally choose higher-risk strategies that pursue higher yields.

Money market funds try to keep their net asset value (NAV) stable, at $1.00 per share, which reduces the risk in investing in a money market fund. However, if the investments perform poorly the NAV may fall below $1.00 per share. On the other hand, the NAV of ultra-short bond funds fluctuates.

Finally, the strict maturity and diversification standards that money market funds are subject to don't apply to ultra-short bond mutual funds too.

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