The High Price of Higher Yields
Seeking loftier rates, some savers actually lost money this year
(MONEY Magazine) – What's New
Although they're often sold as a higher-yielding alternative to money funds and CDs, short-term bond funds have actually lost money this year, falling about 0.25% in the first quarter. The funds' higher yields were not enough to offset a drop in the price of the underlying bonds.
• Use money-market funds if you need your cash in a year or less. Rates on money funds, while lower than bond yields, have tripled in the past year. Plus, you don't risk a loss of principal.
• Stick with short-term bond funds if you won't need to tap the account for a year or more. By 2006, bond funds are once again expected to outperform money-market funds and CDs.
• Either way, be a cheapskate. Focus on funds with expenses under 0.75% vs. the average 0.99%. Lower costs will boost overall returns.
While short-term bond prices will remain shaky this year, analysts expect the funds to rebound in 2006, returning as much as 5% for the year.
SAVINGS NOTES AND SOURCES: CD and money-market account data as of April 12 from 100 Highest Yields ($124 for 52 issues; 800-327-7717). Tax-exempt and taxable money-market fund data as of April 12 from Money Fund Report (imoneynet.com); all have a minimum investment of $10,000 or less and assets of $25 million or more. Bond fund data as of March 31 from Lipper; all are medium-and high-quality funds with average maturities of three years or less.  Manager absorbed all or some operating expenses.  Maximum 1.5% front-end load on investments under $50,000.  Maximum 2.25% front-end load on investments under $250,000.  Maximum 2% front-end load on investments under $250,000.  Maximum 3% front-end load on investments under $100,000.
CREDIT NOTES AND SOURCES: All rates subject to change. Credit-card rates are for standard cards as of April 12 from Bankrate.com and are variable unless otherwise indicated. Survey does not include Internet-only cards or AmEx Blue.  Visa only.  Fixed rate.  MasterCard only.  Platinum and gold cards.