My daughter recently asked me how she should invest a bonus she expects to use towards the purchase of her first home, explains John Bonnanzio, mutual fund expert and editor of Fidelity Monitor & Insight.

Her timeline is one to three years depending on mortgage interest rates and home prices. With that money now sitting in a bank checking account, she knows she can do better interest-rate wise, but she also understands that her short time horizon means that she and her fiancé shouldn’t take much risk (and will therefore have to settle for a smaller return).

My first suggestion was to check her bank’s CD rates and perhaps ladder her investments in six-month increments in case they decide to jump on a worthwhile property. (That would also help to minimize early withdrawal penalties.)

Then she mentioned her Fidelity account. Yes, she can certainly buy bank CDs through them, including ones that are FDIC insured. And like any CD (or bond), higher yields are a function of more credit risk, longer maturities and probably a bigger minimum investment, too.

Then I mentioned Fidelity Conservative Income Bond (FCONX). I explained to her that it’s a bit riskier than a “risk-free” money market fund. She can experience a capital loss — even if only minor. On the other hand, its 3.42% yield is far more than what she’s now getting at her bank.

Then one more option came to mind. Thanks to the Fed raising short-term interest rates, she should also consider Fidelity’s safe and liquid Fidelity Prime Money Market fund (SPRXX). Yielding a comparable 2.95% (the highest at Fidelity), the likelihood of its NAV slipping below $1.00 is quite remote.

The bottom line: Prime and other money funds are now slightly more attractive and safer alternatives to ultra-short-term bond funds.

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