Money Market Fund vs Bond Fund

[Liverpool_SC]

I understand the importance of viewing money market funds as a liquidity instrument - not as an investment. But lately the poor performance of our money market has ticked me off.

It is necessary that my wife and I keep a fair amount of money in liquid instruments just now, as we are planning major renovations to our house, expecting a new child and preparing to purchase a "new" (used) car (with cash) within an 18 month period.

At the same time, it kills me to make only 1.5% or so on the substantial pot of money set aside for these expenditures.

My casual research of alternatives has led me to contemplate replacing my money market fund with a bond fund with check-writing privileges.

I know that bond funds and bonds in general are a rather poor investment choice in our low-interest rate environment. However, would a bond fund with check-writing privilegs be a satisfactory instrument for storing funds I need access to while providing a marginally higher rate of return than the money market fund?

Can anyone see any drawbacks in this plan or provide some alternatives that would give me the advantage of liquidity plus a rate of return that would track inflation a bit better, even if it does not provide true growth in the assets?

Your help would be greatly appreciated.

[Andy_B]

I have been looking for solutions for this as well as we have quite a bit of cash on hand.

We pooled all of cash into one spot and are able to get slightly over 2% at our local bank.

Outside of investing in some ultra low risk funds, there is not much else one can do to stay totally liquid. Even the low risk funds have a time frame in which you can't sell them else a penalty.

Andy

[erikl2]

I currently use a short-term bond index fund for my liquidity account. It provides a modest improvement over money market accounts. But you have to be aware that in any bond fund you can and (especially in this interest rate environment) will lose money as rates go up. The short-term fund is the least effected by interest rates.

Do not get a long-term bond fund, these bonds are incredibly interest rate sensitive. But a total, intermediate or short-term fund are all relatively acceptable choices for a place to stash cash. The shorter the term, the less risky, and lower the return.

[VFish]

I wouldn't use a bond fund for short term money, especially in an enivornment where interest rates are rising. Instead look at the savings and CD offerings @ ING.

[Rickster]

I wouldn't use a bond fund for short term money, especially in an enivornment where interest rates are rising. Instead look at the savings and CD offerings @ ING.

I agree. INGDirect is the way to go. Great rates and great service.

If you are looking for longer term investing and higher yields, consider buying individual bonds. If you get a term that matches your actual need, so that you don't have to worry about selling the bond, you can be sure you'll get the coupon (which is more than can be said for many bond funds).

[Delsocfan]

Netbank gives pretty good rates, but I think you are limited to something like 3 checks per month. There are others funds out there (including my former employer) that give decent rates with unlimited checkwriting and debit card use.