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Investing Specialists

Cash Versus Bond Fund: Which Is Better?

The answer depends on what you're trying to accomplish--and the product you choose.

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Where's the best parking place for the safe part of your portfolio?

If it's money that you expect to spend within the next year--or even two--the answer is easy: cash all the way. Cash investments are very short-term debt obligations that are often FDIC-insured; CDs, online savings accounts, checking accounts and bank-offered money accounts, and money market mutual funds are all versions of cash instruments. (Of the aforementioned investments, only money market mutual funds aren't FDIC-insured.) The yields on all of these investments are generally quite low relative to bonds; on the other hand, these investments promise stability of principal. If you're saving next year's tuition payment or the property tax bill that's due in October, a cash account is the best place to hold those funds. With such a short spending horizon, not losing money is a bigger goal than eking out a slightly higher return.

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Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.