Making Sure Investments Beat Inflation

So where should investors stash their loot?

"Go with a good bond fund or money-market fund," says Christine Benz, director of personal finance at Morningstar.

Though money-market yields are not quite as attractive as CDs, investors have the flexibility to move cash around if interest rates improve. When choosing funds, it might be wise to look at tax-sheltered investments like municipal bonds to avoid a "double whammy with inflation and tax costs," Benz says. Another important factor to consider is the expense ratio, which shows how large the fees are.

If you're looking to lock in rates for a bit longer -- say, three to five years -- municipal and agency-backed bonds might be a better strategy, according to Benz. "They have been unduly beaten down and have some of the best ... managers," she adds, citing renowned bond investor Bill Gross, now managing director of Pimco, as an example.

There are also inflation-protected investments, which guarantee positive real returns but still might not offer the best yield over the long-term. For instance, the Vanguard Inflation-Protected Securities Fund(VIPSX Quote) has a yield of 0.9% tacked onto whatever the inflation rate is. That fund's expense ratio is 0.2%, compared with an average 1.02% for similar bond funds, according to Vanguard.

Though some investors may be peeking at junk bonds -- rates of which have skyrocketed to entice risk-averse investors -- now may not be the time.

Pimco's Gross indicated in a report this month that he's still waiting for the junk-bond market to bottom out with defaults. Pimco is instead seeking out investments in "high-quality" financial institutions that are low on capital, he said.

When shopping around, you can check the best rates available in your area for CDs, as well as money-market, checking and savings accounts at BankingMyWay.com.