(MONEY Magazine) – What's New

In recent months, yields on money market funds have risen dramatically. Average rates are now approaching 3%, up from just 0.5% in June 2004, while the top-yielding funds are paying 3.5%. As interest rates generally continue to rise, money fund yields should go even higher.

Best Strategies

• Favor taxables over tax-frees... if you're in the 33% bracket or lower (income under $326,450 for singles and married couples). Yields on taxables are rising faster, making them a better bet.

• ...and money funds over bank money-market accounts. Over the past four years or so, top bank saving vehicles have yielded more than top funds. Now the trend seems poised to reverse.

• Be a cheapskate. Look for funds with expense ratios below 0.6%, the money fund average. High fees reduce total returns.

Outlook

Rates on money funds should average 3.75% by the end of the year, with top-earning funds pushing 4%. Yields could go as high as 5% in 2006.

SAVINGS NOTES AND SOURCES: CD and money-market account data as of Aug. 16 from 100 Highest Yields ($124 for 52 issues; 800-327-7717). Tax-exempt and taxable money-market fund data as of Aug. 16, 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 July 31 from Lipper; all are medium- and high-quality funds without sales loads and with average maturities of three years or less. [1] Manager absorbed all or some operating expenses. CREDIT NOTES AND SOURCES: All rates subject to change. Credit-card rates are for standard cards as of Aug. 16 from Bankrate.com and are variable unless otherwise indicated. Survey does not include Internet-only cards or AmEx Blue. [1] Visa only. [2] Fixed rate [3] MasterCard only. [4] Platinum and gold cards.