Quora Answer: Are Short-Term Bond Funds Better Than Money Market Funds?

The following is my answer to a Quora question: “Are short-term bond funds better than money market funds?  Is the extra yield worth the risk, in your opinion?”

Money market funds invest in investment grade short term bonds, from sovereign bonds of various types to commercial papers.  So, investing in the money market means you are essentially investing in these short-term bonds, but of the highest grade.  Since money markets are limited in their exposure to any single issuer of debt, except rated sovereign debt such as Treasury bonds, they are diversified, and safe.  Since they invest in the highest rated debt instruments, they have a guaranteed yield.

Short-term bonds, in general, cover all forms of bonds that are due within 12-months, from sovereign to junk.  Whilst the higher the risk, the higher the potential yield, that potential yield is hardly commensurate with the risk, and there is a significantly higher chance of default.  If you are looking at short term debt securities, I would suggest you stick to the money market.  Whilst the yield is slightly lower, you sleep well at night.