Ultra-Short Bond Fund
Candlefocus EditorTypically, these funds invest in short-term corporate bonds,Treasury securities short-term certificates of deposit and Treasury bills. Some funds may hold some higher-risk investments such as reverse repurchase agreementsor collateralized debt obligations. By investing in a range of assets that mature in one year or less, ultra-short bond funds provide portfolio diversification to investors, while at the same time, they provide yield beyond that of traditional bank accounts and Certificate of Deposits (CDs).
On the downside, ultra-short bond funds tend to offer returns that are lower than those offered by other fixed-income securities. This is because they are affected by credit risk, liquidity risk and interest rate risk. Also, ultra-short bond funds are notinsured or backed by the Federal Deposit Insurance Corporation (FDIC). As such, investors stand to lose their entire principal if the issuer fails to pay the interest or principal payments on time.
In high-current-rate environments, ultra-short bond funds may be more sensitive to losses in comparison to longer-term funds due to their short-term nature. This is because when interest rates increase, the underlying bonds within the portfolio experience a decrease in value. However, investors may be able to benefit from ultra-short bonds funds if interest rates begin to decrease.
To experience the most benefits from ultra-short bond funds, investors should understand the different asset types within ultra-short funds, their overall objectives and risk tolerance. Additionally, investors should seek the advice of a financial advisor to craft a custom portfolio that fits their particular needs. In this way, investors ensure that their portfolios are not overly exposed to the risk associated with ultra-short bond funds.