Hi!I think I'm into information overload. My dilema is that I have money in Vanguard's Prime Money Market Fund which I'll need in about a year. I'm thinking about taking some of that money out and putting it into Vanguard's Short Term Corporate Fund. Am I right in my reasoning that MMF's interest rates are so low right now, that it seems that I might get a better interest rate in the bond fund? Also, I'm not sure if the bond fund is as liquid as the money market account.Any advice would be greatly appreciated.Thank youCarol
Carol,I think the Short-Term Bond Index Fund is as liquid as the Prime Money Market Fund. It's return is higher, but it does have a bit of risk should interest rates rise. Given the short-term nature of the bonds that are held, that risk is small but real, a risk I'm willing to take for the higher return. If you reinvest dividends, it further reduces risk, because when interest rates rise, more dividends will be available to buy more shares at their reduced cost. I see this as a version of dollar-cost averaging.db
Am I right in my reasoning that MMF's interest rates are so low right now, that it seems that I might get a better interest rate in the bond fund? Also, I'm not sure if the bond fund is as liquid as the money market account.You will likely obtain slightly better yields in the bond fund, but keep in mind that higher yields always come with higher risks. In this case, should general interest rates rise, you will likely lose some of your principal when it comes time to cash in the fund a year from now. You will have to decide whether you can accept such risk or not.Bond funds are usually not as liquid as money markets, in that most bond funds do not offer such features as check writing, but you should still be able to sell such funds and receive the money in a matter of days.
foobar73,Actually, as I recall Vanguard's short-term bond index fund does permit check writing, but I'm not certain of the accuracy of my recollection.db
The current yield on the short term corporate fund is 2.7%, with duration (as of end of May) or 2 years. Since the yields on both corporate fund and mney market would go up, the boost from reinvested dividends if rates go up, with only a one year framework, is a wash. So, if short term rates are up 1% or less when you withdraw, you win. If more than 1% you lose (ignoring default risk with corporates). Of course, you could just move the money from Vanguard to Ing's Savings account or the best money market rate you could find at your local bank and probably do better, even if raes only go up .5%.All Vanguard Funds, except a few restricted ones, are liquid, in the sense that you can redeem shares and have the money sent to your bank. I don't have check writing or credit card from Vanguard, and don't think that option is available, but I can't imagine why I would want it, since money at Vanguard is for long term. For short term, use a bank or credit union.
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