NEW YORK (Money Magazine) -- How's this for an investment choice? On the one hand, you could put your fixed-income money into a money-market fund (or an equivalent savings account), earning up to 5.1 percent with virtually no risk.

Or you could buy a typical intermediate-term bond fund with a 4.7% yield and the awkward habit of losing value when rates go up (as they did in the first half of this year, for example).

Seems like an obvious call - which is why since April investors have yanked $2.5 billion from taxable bond funds and poured $71 billion into money funds.

After all, if money funds are paying 5%, why on earth do you need bond funds?

It's a question that gets asked, one way or another, whenever a certain kind of fund has been doing better than competing types.

My answer is the same one I'd have given if asked in 1999 why you should not bet everything on tech funds: because neither the good times nor the bad last forever.

Plus, there's a surprise corollary. Even if interest rates were to rise another few points from here - further driving down bond prices - in the long run, bond funds would still beat money funds.

In the short term, of course, the higher rates would favor money funds. Their yields would rise as the funds reinvested their short-term holdings at higher rates. Bond fund payouts would gradually rise too. But in their case, a drop in share value would more than offset the juicier yields.

The problem with this short-term view, however, is that no one knows which way rates are headed.

"Inflation is not dead," says Tom Atteberry, co-manager of FPA New Income, a Money 65 fund. "We expect rates to reach 6% by year-end."

On the other hand, the Fed's recent decisions not to raise rates may signal the opposite. Bill Gross, who runs Harbor Bond, another Money 65 fund, thinks the weak housing market could lead to lower rates by early next year.

If you focus on the long term, though, your best move is a lot clearer: Maintain a balanced portfolio of stocks, bonds and money funds that will hold up through any economic cycle.

To do that, you need bonds to offset the risks of stocks. You know how it works. In 2002, for example, falling rates helped lift bond funds' share prices and brought their total return to 7.2% - a nice counterpoint to the carnage among stock funds, down 21.7%.

Another reason to keep a long-term focus: If you patiently reinvest your dividends, you'll do better in a bond fund in the long haul, even if interest rates go up. As rates rise, bonds do take some lumps. But as you reinvest, you buy at ever-higher yields, and after a few years the extra income offsets the drop in price.

"Over time most of a bond fund's return comes from income," says Kenneth Volpert, head of fixed-income investing at Vanguard, "so higher rates eventually produce bigger gains than falling ones."

In other words, don't let 5% money funds put you off your long-term plan. Today, as always, you should own bond as well as money funds - just be sure you take full advantage of both.

Here's how.

Get the best yield you can on your cash The best money funds (and bank money-market accounts) pay more than 5% now, but that doesn't mean that you are getting 5%. You have to seek out those top yields.

Stick with intermediate-term funds Short-term bond funds are safer, and long-term funds have higher yields. But intermediate funds - those that own bonds maturing in three to seven years - are the sweet spot.

Says Morningstar analyst Scott Berry: "They give you most of the return of longer bonds with much less risk." The Money 65 includes three such funds: Dodge & Cox Income (DODIX), Harbor Bond (HABDX) and Vanguard Total Bond Market (VBMFX).

Top up your bond fund stash After several years of lousy performance, bond funds may well make up less of your portfolio than you first intended. Get back on plan by moving some money from your winners - energy funds, perhaps? -into those lagging bond funds. Doing so forces you to sell high and buy low.

Whatever you think about rates, it's hard to argue with that investment goal.

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