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BOND FUNDS: SHORT-TERM GAIN?

April 17, 2013

While the average rates of return for short-term funds aren't going to sustain an investor through
retirement, there are certainly a few solid choices for those looking to put their money away in the near term.
-Dylan Cathers, mutual fund analyst, S&P Capital IQ

 

Let's start out by stating the obvious: Short-term U.S. Treasury bond rates are low -- really low. They are going to remain low really low. The Federal Reserve has stated on multiple occasions that it intends to keep bond yields at their current levels until the economy picks up steam. Recently, it said it will keep short-term rates near zero percent until the unemployment rate falls below 6.5%. Standard & Poor's expects the yield on Treasury bills to remain at 0.1% at least through early 2014.
What is a short-term investor to do?


While the average rates of return for short-term funds aren't going to sustain an investor through
retirement, there are certainly a few solid choices for those looking to put their money away in the near term. To look for such funds, we screened for Short-Term Fixed Income style funds. We stuck to funds that earned a five-star ranking, while paying close attention to costs. Expenses are particularly important when it comes to bond funds, as a high expense ratio can offset the modest gains typically associated with these funds. To account for this, we selected funds that had a positive cost factor mark in our screen. Also, we eliminated those that are closed to new investors or have minimum initial investments over $5,000, as well as institutional share classes.

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