Introduction
An ultra-short bond fund is a fund that invests in fixed-income instruments having short-term maturity period. Investing in short-term funds yields higher returns than most money market instruments.
Understanding Ultra-Short Bond Fund
The fund generally invests with a time horizon of around one year. Due to the shorter time period, these funds are not affected by changes in interest rates.
Factors to Consider
Ultra-short term funds are focussed on high returns and invest in risky securities. They are unlike most money market mutual funds which invest only in high quality, short-term investments issued by the government and government corporations.
Money market funds are subject to stringent regulations with respect to diversification and maturity standards.
In a high-interest rate environment, ultra-short bond funds are prone to losses. The funds' duration may help in determining its sensitivity to interest rate fluctuations.
Investors must read through the prospectus of the issuing company to understand the risks involved, the maturity, and returns on the bonds.
The ultra-short bond fund helps in protecting investors income against interest rate risk compared to long term bonds. Since the funds are of short duration, the funds are less affected by an increase in the interest rate.
Certain ultra-short bond funds invest in risk-free government securities, and others invest in bonds with lower credit ratings or derivative securities.
Ultra-short bond funds are not regulated by strict investment guidelines. The funds operate in a relatively free market environment and pursue higher yields by investing in riskier securities.
Investors should be aware of the kind of securities an ultra-short bond fund invests in. The returns on the fund can be hit if a credit downgrade or default of portfolio securities take place.
