For some investors, a short-term bond fund can take the place of a money market account or a certificate of deposit. Short-term bond funds are mutual funds or exchange traded funds that invest in government or corporate bonds with relatively short maturities, usually between one and three years. They're relatively liquid investments, but because they're mutual funds or exchange-traded funds, you usually can't just write a check or go to an ATM machine to tap into them.
The first step in pulling money out of your short-term bond funds is to sell shares. If you want to liquidate $5,000 and the fund trades at $10.50 per share, you'll have to sell between 476 and 480 shares to do it. The variance comes from any commissions that you may pay. With exchange-traded funds, you pay the same commission you would for any other stock. Mutual fund fees depend on the particular terms of your fund and your account. Some companies even waive fees when you trade funds that they provide.
Once you sell your shares, you have to pull the money out of your brokerage account. One way to do this is through electronic funds transfers, which can take a couple of days. Alternately, you may be able to get the money wired on the same day, or, if you aren't in a rush, have a check mailed to you. Some brokerage accounts come with ATM cards or check-writing privileges, which let you write yourself a check potentially to access your money more quickly.
Unlike bank deposits or certificates of deposit through a broker, short-term bond funds have prices that fluctuate. Like any other mutual fund, their share price is based on their net asset value, and if the market decides bonds are worth less money, your deposits in the fund will be worth less. This adds an extra element of risk to these funds because if you withdraw from them in a bad market, you could find that the extra return you get from them is swallowed up by the low share price.
Tax on Withdrawals
Because short-term bond funds are mutual funds, selling them to convert them into cash leaves you subject to capital gains tax. If you sell your shares at a profit, you'll have to pay capital gains taxes, but if you sell them at a loss, you will receive a capital loss that you can use to offset other gains. Bear in mind, also, that profits you earn on short-term bond fund shares that you've held less than a year are taxed as short-term capital gains at your regular income tax rate instead of at the preferential long-term gains rate.
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