r2i forum

Dear Friends:

As Inflation is rising, the fed might decrease the interest rate in near term. I want to DCA every month into a bond fund (as i feel this is the right time to invest as when interest rates decreases bond prices may increase) - preferably a Vanguard funds (Short-Term Corp or Inflation-indexed bond or any Vanguard bond funds). The investment objective is for 2 years, the expectation is around 5%, the risk is to protect the prinicipal and all the funds will be taken out by March 2009.

The other option I am looking is to safely keep in money market funds (Banks or Mutual yielding 5% currently but eventually when interest rates decrease, the yields will be in the range of 2%), but it is not a suitable option when interest rate decrease.

Can Desi, RRK & others suggest a good fund?

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As Inflation is rising, the fed might decrease the interest rate in near term.

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When inflation rises, the fed tightens money supply to keep inflation in check, and this means increasing the interest rate and not decreasing it as one of the measures to manage inflation.

[quote]The investment objective is for 2 years, the expectation is around 5%, the risk is to protect the prinicipal and all the funds will be taken out by March 2009.
[/quote]

With that as your objective, why would you not go for a CD. You can get a 2 year CD paying over 5% .

Desi - Thanks for your response. I want to save money every month from my paycheck for 2 years. DCA is the only strategy available as I am not going to fund in one-shot. I hope CD provides a solution if I invest in lump-sum which is not in my case. Can you please help me a strategy DCAing with vanguard funds to realize a modest gain with minimal or no risk?

Regarding the Inflation vs Interest rate, I understand that when inflation is more the fed has to increase the interest rate. However if US fall's into recession in near term or by the end of the year, then fed might decrease the interest rate and we will have to look into bond funds as bond prices will rise and do you think is this the right time to DCAing into bond fund for my investment horizon?

I would suggest money market. However you somehave seem to be prognosticating a 3% rate cut in next two years and a higher inflation to moot. Given deference to your views, I suggested a CD and now considering that you want to DCA.

My suggestion is Vanguard money market with money rolled over into a CD every 3 months. This way you will have multiple CDs of varying terms that all mature after two years.

Thanks Desi for your fast response and your valuable suggestion. I will look into vanguard money market account and possibly rollover into a CD every 3 months.

The suggestion of Laks0 is actually better.

The Vanguard MM has a minimum requirement, else there are charges. This makes Vanguard MM not as great if you want to DCA into it starting out small. Bankrate website also gives you listing of the CD rates.