MONEY-MARKET FUNDS are often touted as the safest kind of mutual fund, but whether that s true depends on your perspective. On the one hand, it's almost impossible to lose your principal. On the other, their returns are low, which means they may not offer the growth you need to meet your financial goals. Consequently, money-market funds are most useful for parking cash you need in the short term to buy a car or make the down payment on a house, for instance, or to pay next year's tuition.

The reason money funds are so stable is that they invest in ultra-short-term securities like those issued by banks, the federal government or big companies with strong credit ratings. Your return comes in the form of a dividend. In these respects, money-market funds are very similar to bank certificates of deposit.

The advantage of a money fund is that it is completely liquid. Unlike with a CD, which will lock up your money for at least three months (or significantly longer if you want a decent yield), you can sell your shares in a money fund at any time. They also often offer perks like the ability to write checks against the principal. The advantage of a CD is that your deposit is usually insured by the federal government.

There are various types of money-market funds, based on the type of securities they buy, but the most important distinction is whether your dividends are taxable or tax-free. The yields on tax-free funds are somewhat lower than those on the taxable funds, but if you're in a high tax bracket, this could be the way to go.