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Ultra-Short Bond Mutual Funds Basics

Ultra-short bond funds, like other bond mutual fund, invest in various securities (such as government securities, mortgage-backed securities, corporate debt, etc.) but generally choose fixed income securities that have extremely short maturities. Ideally, an ultra-short bond fund would choose investments with maturities around one year.

The ultra-short bond funds' investing strategy tends to offer higher yields than other relatively low risk investments, such as money market funds and certificates of deposit (CDs), and have less price fluctuations than a typical short-term fund.

And yet, ultra-short bond funds are not required to follow the same investment guidelines as money market funds and certificates of deposit and generally carry more risk than them.

Risks and rewards when investing in ultra-short bond funds can vary significantly among different funds. If you consider investing in such a fund carefully examine and take into account the factors that determine the level of risk associated with the particular ultra-short bond fund. Here is what you should look for:

  • Credit risk

    Look at the quality of the fund's investments. When it comes to investing in government securities, the credit risk is less of factor. However, when it comes to investing in private label mortgage-backed securities, bonds of lower credit rating companies, or derivative securities, the risk of experiencing losses due to credit downgrades or defaults of the portfolio securities is high.

  • Maturity dates

    Generally, an ultra-short bond fund that invests in securities with longer average maturity dates is considered to be riskier than one with shorter average maturity dates.

  • Interest rate changes

    When interest rates go down, the value of debt securities goes up and vice versa. Thus, if you consider investing in any bond funds you should take into account the interest rate environment.

You should learn more about the particular ultra-short bond fund you are interested in by reading all of the information available to investors, including the fund's prospectus. As always, be careful when you are promised greater potential for return at allegedly no additional risk.

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