Winning the money game with stable bond funds.

December 31, 2008 5:32 AM

I'm looking for a basic, no-frills bond fund where I can park money with a minimum of risk.

In years past, I've relied on Vanguard Short-Term Investment-Grade (VFSTX) for "storing" money that I'd like to access a year or two down the road. The NAV varies between 11 and 9, and the yield is 5%. A great money parking fund.

I'm interested in recommendations of other funds, either Vanguard or non-Vanguard, with stable NAVs and reasonably good yields.

Also, what are additional investment options in this category? What other investments can be relied upon for good yields and high liquidity due to little appreciation or depreciation in the underlying capital of the investment? Money market, CDs, anything you can recommend. Bonus points for products that beat the Vanguard Short-Term bond fund yield.

(Disclaimer: I realize that all investments are subject to risk and that I should discuss my investment profile with a qualified professional blah blah blah.)

posted by Gordion Knott to work & money (3 comments total)

IANYB

Right, so what's so great about Vanguard is they make a real effort to keep their expenses low. Most other fund companies don't.

You currently have a actively managed fund. Short term bonds are a relatively efficient asset class, so it's going to be difficult to get a manager to pick up enough of edge to offset their fee. This isn't as big a deal with Vanguard, because they're such wonderful skinflints, but why not just get an index fund, like VBISX?
posted by leotrotsky at 6:37 AM on December 31, 2008 [2 favorites has favorites]

Depending on your specific tax situation, you might want to consider municipal bond funds. For example, take TFI, which is essentially an index muni fund: it has a 0.2% expense ratio and is currently yielding around 4%. Given the generally favorable tax treatment of munis, that 4% might turn out better than 5% elsewhere. I don't know specifically about liquidity, but it is an ETF -- a little thinly traded, but traded nonetheless. As for NAV, the historical data on Yahoo is a little messed up, but on Google, you can see that it's been pretty steady at around $20-$21, with a dip down to $17 around the financial crisis time, although it really only has about a year of data.
posted by mhum at 11:07 AM on December 31, 2008

I won't tell you which option is best for you, but it is possible to buy Treasury securities directly. TreasuryDirect will let you invest small sums at the final auction price (larger investments need to bid on yield). Granted, recent auctions have had terrible yield, but at least the capital is safe (as a US citizen, you've got much, much greater things to worry about should the government decide to default on it's debt).

But your demands are basically at odds with one another. You're largely discounting the possibility of loss of capital and focusing on yield. For example, VFSTX lost in value more than it paid out. And your yield of 5 percent is based on backward looking evidence. I humbly submit that this bond fund will not pay out 5 percent yield over the next year. Evidence: they haven't paid a dividend since October, the bond market siezed up in September, and current auctions are low yield.

The main difficulty is going to be transaction costs if you fail to time the bond expiration with your need for that money. SellDirect will charge 45 dollars to sell them at Chicago. Whether this is a good deal then depends on how well your other investment performs, management fees and how much you have to invest.
posted by pwnguin at 3:07 PM on December 31, 2008