Vanguard Short-Term Investment-Grade Fund

[RusticBohemian]

I'm about to receive $10,000 as a gift (which means no taxes), and I plan to use that money as down payment on a house in 1-3 years.

I'd like to invest it in something that will yield some income, and am giving serious through to the Vanguard Short-Term Investment-Grade Fund: https://personal.vanguard.com/us/funds/snapshot?FundId=0039&FundIntExt=INT#tab=3

APY is:
1 Year: 1.98%    
3 Year: 2.22%
5 Year: 2.66%    
10 Year: 3.72%

Even in the worst case scenario, it looks likely to beat the APY for the best 1-year CD I can find at 1.20%

Any reason I shouldn't go with the vanguard fund?

Some fees or other issues I'm forgetting about?

Is there a better option? What is it?

[skyrefuge]

I'm not sure if you're misunderstanding what VFSTX is compared to a CD, or if you're just a bit loose with your terminology, but:

VFSTX, a mutual fund that holds a set of bonds, does not have an "APY". An APY (annual percentage yield) is a promise that you will receive that return in the future on your investment for the specified period. The numbers you list for VFSTX are simply what it returned in the past. It makes no promises about future returns.

Though it is not common, it is entirely possible that your investment in VFSTX can lose money, which is not possible with an FDIC-insured CD. For example, if you had invested your $10k in 2008, you would have been left with only $9.5k in 2009. On the other hand, if you had held on to it 'til 2009, it would have bounced back up to $10.9k.

It's up to you to decide whether that risk is worth the reward over a CD, which is basically the entire crux of investing.

A short-term bond fund is one of the least-risky non-guaranteed investments you can make, though there are also a whole bunch of other Vanguard short-term bond funds you could select from, all with slightly different risk/reward profiles.

[Indexer]

Well first I wouldn't assume those returns will continue.  The numbers you posted are total returns, not APY.  Bond yields have been going down in the past 10 years which helps the price go up in the short term but thanks to the lower yields it means lower projected returns in the future. 

What option makes sense depends on your time frame and your risk tolerance.

The short term investment grade isn't a bad option if it meets the above two criteria.  I've used it myself as an 'almost cash' fund in the past.  In a crisis it can drop 5% so it is not without risk.

One step up in risk and VASIX becomes an option.  Its 80% bonds and 20% stocks which gives you about the same risk profile as being 100% bonds but you have more return potential.  In a crisis expect it to be down 10%.  If you can handle a 10% swing, or if you are ok delaying a home purchase by a few months if the market crashed this could be an option.  (It is what I use as my conservative fund for short term investments now.)

[RusticBohemian]

Thanks, Indexer.