<i>I am wondering whether it is better to have such an "emergency fund" invested in (a) a money-market fund, (b) a short-term bond index fund, or (c) some combination of the two.</i>Due to the potential fluctiations of bond fund NAVs, it's probably not a good idea to put emergency money in a bond fund - you may come up short when you really need it. The same is probably true of a money-market fund. More appropriate would probably be either a high interest savings account or a short term CD that you continue to roll to the best interest rate. There might be an early withdrawal penalty if the timing of your emergency was bad, but with a short term CD, the penalty will be very small.Most market investment vehicles have some element of risk to the underlying prinicipal. You do not want risk in an emergency fund, unless you have sufficient other assets to make up for it. But, in that case, it wouldn't be so much an emergency fund as a cash flow fund.Hedge
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