The Ultra-Short Bond Fund

The ultra-short bond fund is a type of mutual fund that is often sought after by those that want a safe place to store their money. This type of bond fund became very popular in recent years but it does have some drawbacks as well. Here are the basics of the ultra-short bond fund and how they work.

Ultra-Short Bond Fund

This is a mutual fund that invests in various types of short-term bonds. Some of the bonds that the fund will invest in are government bonds while others are corporate bonds. Any of them will also invest in mortgage-backed securities as well. The ultra-short bond fund typically invests in securities that are set to mature in three months or less. In some cases, the maturity dates might be more than a year, but as a rule, they will be very short term.

Interest Rate Sensitivity

This has been considered to be a worthwhile investment for many because it is not very sensitive to interest rate changes. Since the majority of securities in the funds are set to mature in a very short period of time, they will not be negatively affected by interest rate changes. This makes them a relatively safe form of investment for you to consider.


Although many investors consider this to be a safe place to park your cash, they do carry with them some risk. In fact, many of these funds did not fare well during the financial crisis of 2008. Some of them actually went out of business as a result of problems in the financial market. These funds have been known to invest in corporations that do not have exceptional credit ratings. This increases the risk of the portfolio overall and could cause you to lose money on your investment.

Some of these funds will also invest a majority of their funds in mortgage-backed securities. When the real estate market is doing well, this seems like a very sound investment. However, when the real estate market takes a tumble like it did around 2008, this could be a very negative thing for the fund. This means that before you get involved with a bond fund of this type, you need to find out what type of investments they tend to choose. Some of these ultra-short bond funds can be very risky to investors.

Common Alternatives

Many investors choose this type of bond fund as a way to invest money that they do not need in the near future. It can provide you with some nice returns as long as everything goes according to plan. There are also a few common alternatives that investors will turn to if they do not like the idea of investing in an ultra-short bond fund. 

One option that you have is to invest in a CD. These are commonly offered at banks and financial brokerages. They will provide a similar return for investors with the peace of mind that comes with being FDIC insured.

Money market mutual funds are another common alternative. Money market mutual funds are considered to be a little less risky because they cannot take on risky investments like the ultra-short bond fund can. 

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