Ultrashort-bond funds invest mainly in Treasury, mortgage-backed, and corporate bonds. They limit risk by sticking with short-term securities. With an average duration of just six months, they don't feel much pain when interest rates rise. Money markets, by contrast, carry durations near zero, but offer lower returns.
If you don't want to put your principal at risk, but would like to eke out a little more return, ultrashort funds are a good first step away from money market funds.
Some funds dip into lower-quality bonds for their higher yields, though. Such funds look safer than they are, because bond defaults have been few and far between in recent years.
Short-Term Municipal Bond Funds >>