Ultrashort Mutual Funds

Ultrashort funds typically own a variety of investment-grade debt from government agencies, corporations and mortgage issuers with an average AA credit-rating. Because these bonds will mature soon, ultrashort funds are less sensitive to interest-rate movements that can badly affect longer-term bondholders. The principal of such funds fluctuate, unlike a money-market fund, but the fluctuations tend to be minor. It's a low-risk option for getting a rate higher than conventional savings account or Certificate of Deposits (CDs).

Prices of such a Bond typically fall when rates rise. Both 1994 and 1999, for instance, were punishing years for bonds. Rising rates pushed intermediate-term bond funds down 4% on average in 1994, and the group lost 1.3% in 1999. But ultrashort funds, with their ability to renew themselves, rode the rising-rate trend to post average gains of 4.4% in 1994 and 2% in 1999.

Because they offer low-risk income, ultrashort bond mutual funds should be considered along with money-market funds and bank certificates of deposit (CD) as a good option to keep your cash for a short time. Look for low expense ratio funds. A few names are: Fidelity Ultra-Short Bond Fund (FUSFX), Payden Limited Maturity Fund (PYLMX), Schwab YieldPlus Fund (SWYPX), Vanguard Short-Term Tax Exempt Fund (VWSTX).