Cash or bonds?

Q – Your 2002 Buyer’s Guide to Mutual Fund indicates that in an uncertain economic climate an asset mix of 25-40% Cash, 25-50% Fixed Income and 30-50% Growth. is suitable.

My question: Why would I hold money in a cash fund (Money Market) when almost all fixed-income funds give a higher rate of return and are relatively low risk? If the fixed income fund is a bond fund invested in government bonds, for example, is there an advantage to holding cash as well? I can switch within the fund family at no cost at any time to any of their other funds (growth, foreign, etc.) – G.D.

A – Actually, bond funds are not as safe as money market funds. They do not have a fixed NAV (net asset value) and the price of bonds, even government bonds, will fall when interest rates rise. We actually saw such a phenomenon in the three months to May 31, when the average Canadian short-term bond fund dropped 0.1% in value while the average money market fund rose 0.3%. Several short-term bond funds actually lost more than half a percent over that time.

So yes, there is a difference. If you want to avoid risk entirely, go with moy funds or T-bills. – G.P.