Low or No Risk, Decent Return: Some Popular Liquid Accounts

Short-term cash accounts such as Treasury bills and money market funds are virtually risk free, which means your chance of losing principal is low or nonexistent. Whatever you put in you should get back, plus whatever interest you earn.

The only real risk with cash is that short-term interest rates could decline, quickly lowering your rate of return.

The Federal Reserve in effect controls short-term rates. So for rates to drop, either the Fed would have to start cutting its key rate or financial markets would have to push rates lower in anticipation of a Fed cut.

The central bank has been raising rates for two years, lifting its benchmark from 1% in mid-2004 to 5.25% now.

The big debate is whether the Fed is done, or nearly done. On Thursday, after it raised its rate from 5% to 5.25%, the Fed hinted that it might be ready to pause.

Once the Fed decides to stop, the next debate will be whether it can begin cutting rates again. And that will depend on whether the economy weakens and whether inflation eases.

If you expect rates to tumble, a better bet than a short-term account might be an investment that locks in a yield for a longer period -- such as a five-year Treasury note, the annualized yield on which now is 5.09%.

For the moment, many cash accounts are paying the most in five years. Here’s a summary of the most popular cash options:

* Money market mutual funds: These funds own short-term IOUs of companies and government entities and pass the interest through to shareholders. The average annualized yield on taxable funds was 4.59% as of last week, according to IMoneyNet Inc. The average yield on tax-exempt money funds (which own short-term municipal IOUs) was 3.32%.

Money funds have no minimum holding period, unlike short-term accounts that have specific terms. Your rate of interest fluctuates with the market, rising as market rates rise and falling as they fall.

* U.S. Treasury bills: Investors can buy three- or six-month T-bills directly from the government (at www.treasurydirect.gov). The annualized yield on three-month bills was 4.98% on Friday; it was 5.23% on six-month bills. Your principal is returned when the bill term is up.

One advantage of T-bills: Their interest is exempt from state income tax, although it is subject to federal income tax.

* Bank accounts: Banks offer money-market-like accounts as well as savings certificates of various terms. All of the accounts are federally insured, offering risk-averse investors even more peace of mind.

Nationwide, the average yield on six-month bank certificates was 3.35% as of last week, according to IMoneyNet. The average yield on one-year certificates was 3.89%. But banks vary widely in what they pay on savings certificates. Your best bet is to shop around. (See a list of high-yielding accounts on Page C6.)

One caveat: Savings certificates typically charge a penalty if you withdraw money before the term is up.