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3 Funds for Short-Term Goals

Susan Dziubinski

Susan Dziubinski: Hi, I'm Susan Dziubinski from Morningstar.com. Morningstar director of personal finance Christine Benz suggests that investors with short-term goals maintain about 20% to 40% of these assets in cash equivalents, such as certificates of deposit and money market accounts; another 40% to 60% in a short-term bond fund; and the remaining 20% in an intermediate-term bond fund. Here are three of Christine's favorite funds to fill the latter two sleeves.

Alaina Bompiedi: At the end of February the U.S. Treasury yield curve was notably flat with some tenors at the shortest end of the curve actually inverted. Given that geometry, Silver-rated Fidelity Short-Term Bond was sitting in a pretty attractive position. The fund follows a 1- to 3-year benchmark compared to some peers in the short-term bond Morningstar Category, which follow a 1- to 5-year benchmark. That gives the fund a slightly shorter duration than most in its category, and while that has muted its performance over the long term, it's made it pretty resilient during periods of rising interest rates. The fund also carries about half of its assets in corporate bonds, which gives it a little bit of octane over its benchmark. Given those features we think it's a pretty dependable choice in the short-term bond category at the moment.

Beth Foos: For investors concerned about the potential impact of rising interest rates on their portfolio and who are interested in tax efficiency, the Morningstar muni national short category is definitely worth a look. That's because these funds generally take less interest'rate risk than a typical muni national bond fund. And therefore, are less likely to see a significant impact on their returns when interest rates do rise. Now a standout fund in this category continues to be Fidelity's Limited Term Muni Income fund. It's run by an experienced group of managers that takes a very straightforward approach to building this portfolio. They avoid tools that can add too much volatility, and they keep a careful eye on liquidity and the credit quality of the portfolio to make sure that neither dips too low. Instead they rely on bottom up solid credit research to build the portfolio and that's resulted in solid returns over the last five- and 10-year periods for their investors.

Benjamin Joseph: Gold-rated Dodge & Cox Income stands out for its relatively patient and at times contrarian approach to investing. The fund's manage,r who average 21 years of experience, start with an investment horizon of 3 to 5 years. They run a fairly compact mostly cash bond portfolio. The managers tend to favor corporates, noting that the yield advantage offered by these securities is an important contributor to total returns over time. Over the long haul patience and the focus on fundamentals has paid off. The fund's trailing 10-year return of 5.1% through January 2019 beat two thirds of distinct peers and outpaced the index annually. It also looks strong on a risk-adjusted basis with a Sharpe Ratio over the same period that lands in the best quintile of its category. With lower fees and skilled managers, we believe this fund can be a strong option.