Ensuring financial stability in today’s world is a challenging process. Yet, that doesn’t mean people can’t reach their goals at all. Competition in every field is tough. If you truly want to reach your goals, you want to invest time and effort to improve your knowledge. Starting from this article is a smart move.
People know how essential it is to be ready to invest your money. In this article, we will focus on bond fund investments. There is a good reason why we decided to analyze them. People often believe that bond funds only a monolithic group in the investment world. However, claiming something like that is not correct. In today’s world, there are different types of funds that can help you ensure financial stability.
Our goals, mentalities, and approaches are different. That is the reason why you should know that short-term fixed-income funds are not for everyone. They are an excellent option for people that need to prioritize capital preservation. Logically, the short-term type of funds is not going to offer a lot in the way of yield. However, that doesn’t mean they should not be one of the options that you have.
As we said, knowledge improvement is essential for your success. Because of that, we will analyze everything you should know about short-term fixed-income funds. Let’s get started.
1. Before Everything – What Exactly Are Short-Term Fixed Income Funds?
Some of you are already familiar with short-term fixed-income funds. However, those that are not sure what they deserve to get an explanation.
It is a type of fund that invests in bonds with maturities of less than five years. That is the reason why they contain the phrase short-term in their name.
2. The Risks You Will Have to Deal with
It would be unfair to say that everything around short-term bonds is perfect. On the contrary, the beginners should also be familiar with potential risks they will, sooner or later, face.
These funds often have a low-interest rate risk. That especially counts when compare them with long-term and intermediate fixed-income funds. Because of that, they can keep their value even when the conditions are not on your side. However, even with low-interest rate risk, people can lose their principals.
There are two different things we have to highlight here. When the short-term funds fall, the losses that investors experience are mild. Despite that, it is equally important to understand that their value does not grow in the same ways as the value of long-term fixed-income funds.
On the other hand, don’t expect that all short-term bond funds are designed in the same way. Certain funds invest only in securities with higher credit risk. A good example of that is high-yield bonds. On the other hand, other funds will strive to offset only the low-yield environment. They will do that by venturing into higher-risk securities.
The investors and fund buyers need to be careful when buying a short-term fixed income fund. There are certain things they need to check, and one of them is a recent daily fluctuation that is relative to its peers. The pieces of information you gather can help you make the right decision. For instance, you can’t expect safety if the exhibits are above-average volatility.
There is another characteristic of short-term bond funds we need to highlight here. They usually offer a low yield. In most cases, yield and risk come together in the bond market. In most cases, the yields do not have the necessary strength to overcome the impact of inflation properly. Yet, all the investors pay the price of low yields when they achieve a greater degree of safety.
3. The Comparison Between Money Market Funds and Short-Term Fixed Income Funds
It is correct that short-term fixed-income funds bring higher risk compared to market funds. However, that doesn’t mean people should avoid them. They can also offer a higher yield compared to their direct competitor (money market funds). That is the reason why people with a bit longer investment horizon should focus on short-term bonds. For instance, the time an investment is expected to be held should be between two and three years.
4. More Reasons Why Short-Term Fixed Income Funds Deserve Your Attention
We need to make something clear here. If you are expecting to get rich, short-term bonds are not for you. The purpose of buying these funds is a bit different than that. We will highlight the most valuable ones.
First of all, they can serve as a good alternative to the different options that also offer a low yield. Despite that, people often do not know how to properly save their money. When the money is in our bank account, we often find a way to spend it. On the other hand, if you invest them in short-term fixed-income funds, that option won’t be available to us. In most cases, people place their cash for around two or three years. However, you must place the money that will be unnecessary for you in the future period.
Their ratio-of-return is attractive. Of course, as we said, these funds are not going to make you rich. Yet, when the ratio-of-return is positive, you can be sure the investment of that type will pay off in the end. It is not something you can always expect with long-term fixed-income funds.
We once again need to repeat that their sensitivity to rising inflation is not strong. That especially counts when we compare them with long-term and intermediate bonds. The liquidity is also at the highest level, and that allows every investor to access to his capital easily.
Final Thought
We will repeat the phrase that Mark Zuckerberg said in one of his interviews. He said that not taking any risks is the biggest risk of all. Because of that, it is essential not to be afraid of the potential risk you may have to deal with. The knowledge improvement is going to help you make better decisions. That is the reason why we recommend you read more about short-term fixed-income funds and gather all the necessary information. In this article, we only covered the basics. There is much more you will have to study.
