High-yield investments that minimize your risk.

For those willing to do thier homework, specialized mutual funds, higher-yield CDs and other investments can offer a better-than-average payoff.

In the go-go '80s, some investors built personal portfolios with ease. Money-market accounts and certificates of deposit (CDs) were yielding 9% and 11%. And a $10,000 CD was earning 9% interest, or $900 a year.

But times have changed and high, safe yields are long gone. A harsh recession and weak recovery leave many hard pressed to find a short-term CD earning even 4.5% interest.

Savers and investors are confronting some of the lowest interest rates in 30 years, which are sapping the returns on traditional short-term investments. Ironically almost 40% of American families' assets, excluding pension funds and life insurance, are short-term. Nearly 30% of a families' assets are in CDs, bank deposits and money-market funds. Short-term assets total $3.5 trillion, or 50% more than the money invested in stocks or bonds.

Since short-term investments no loonger have the purchasing power of yesteryear, people will have to look for longer maturities. "Now may be the last time to lock into a high interest rate," says Charles I. Clough, chief investment strategist with Merrill Lynch & Co. Inc. in New York. "But that may mean tying up your money for five to eight years."

That isn't too bad considering you can find five-year CDs yielding 7%. And by moving to long-term Treasury notes and bonds you can get a yield of about 7.5%. The yield on a 30-year mortgage-backed security is a little more than 8%. Of course, the adverse effect is that when interest rates rise, the market value of bonds, mortgage securities and other fixed-income vehicles fall. Economists expect rates to rise slightly after the presidential election.

From a short-term standpoint this is not the best time to swim the financial waters, says Clough. But a dip into long-term investments can be advantageous. "And a long-term investor is what you want to be," he says.

Clough says investors should be using dollar-cost averaging, which allows you to buy fewer securities when prices are high and more when prices are low. By buying investments at set dollar amounts and at fixed intervals, you earn profits regardless of market ups and downs.

This systematic approach is perhaps the best way to protect your money and make it grow. There simply aren't too many investments paying higher yields that are still considered safe, says Clough. Then again, investors should not even look at yields, says Charles Ross, a certified financial planner, syndicated columnist and host of "Your Personal Finance," a radio show in Atlanta.

Of course, if you are a millionaire and don't need the dividend income, you may decide to dabble in high-risk investments that may produce higher yields. "But the average, low cash-flow investor should seek intermediate investments that offer growth," says Ross.

It is possible for investments with moderate yields to provide impressive appreciation. Investors may do better by focusing on investments offering the best total return or a combination of capital appreciation and dividend income. "Once you step away from fixed-rate vehicles that lock in your money for a set period of time, total returns count more," says Walter Frank, chief economist and investment officer for IBC/Donoghue's Money Fund Report in Ashland, Mass. For instance, "The actual yield or payout on adjustable-rate mortgages in the first quarter of the year was around 7%. But the actual return was only around 3.25%," he says.

Generally, there is a trade-off between risk and return. The rule of thumb is that the greater the risk, the greater the return on your investment. However, you can reduce risk yet still increase your potential reward by diversifying your portfolio.

Of course, keeping pace with a fast-changing market is not always easy. The following suggestions can guide you to locking in attractive returns and yields. Choose those investments that satisfy your tolerance for risks and meet your financial objectives.

Short-Term Bond Funds 

You can court short-term bonds, but don't marry them. There's no guarantee that your principal won't decline in value, especially since some funds may raise yields by investing in lower-grade bonds. The riskiness of these funds is minimal for those that hold bonds rated A or better. Short-term bond funds are averaging yields of around 7%.

Consider domestic and international bond funds in which the average portfolio matures in less than three years. The potential capital loss from a rise in interest rates is small unless rates rise sharply, although this is unlikely to happen.

Recommendations for domestic short-term bond funds include: * Scudder Short-Term Bond Fund, (800-225-2470); * Fidelity Short-Term Bond Fund, (800-544-8888); * Vanguard Fixed-Income Short-Term Corporate Portfolio, (800-662-7447); and * Strong Short-Term Bond Fund, (800-368-1030).

Municipal Bonds

Better known as munis, municipal bonds continue to offer good returns and stable market values. Munis typically pay 80% more than U.S. Treasury bonds. Bonds that mature in about 2 1/2 years are yielding around 4%. Those maturing around 7 1/2 years are yielding 5.5%.

Munis are an attractive investment because the income from these funds is usually exempt from federal and state tax. (See "Earning Tax-Free Income," Personal Finance, March 1991.) This makes bonds attractive to someone in a higher tax bracket. Someone in the 31% tax-bracket can earn the same after-tax income from a muni yielding 5.7% as they would from a taxable security yielding 7.6%.

A surge in municipal bond demand and limited supply could affect a huge number of munis being redeemed (called) early or refunded. Bonds can be sold on the open market at any time. Unfortunately, you lose money if munis are sold prior to maturity.

An even greater risk associated with munis is that the city or entity issuing the bonds could go broke. To avoid being a victim, look for insured bonds, backed by one of several AAA-rated insurance companies, such as Ambac Indemnity Corp. By doing so, you are guaranteed to get your money back.

For steady tax-free income in addition to less risk for your capital, consider intermediate to long-term unit investment trusts, which are yielding around 6.5%. Unit trusts are portfolios of fixed-income securities and usually hold a small, diversified number of corporate, municipal or government bonds, mortgage-backed securities or preferred stock.

If you are concerned about safety, buy unit investment trusts that are rated AAA or are secured for payment of principal and interest by an accredited bond insurer.

Treasury Notes, Bonds And Bills

Treasury securities are still one of the safest investments, because they are backed by the government. Another benefit is that the interest you earn is exempt from state and local taxes.

Notes are usually sold in denominations of $5,000 if they mature in less than four years, and in minimum denominations of $1,000 if they mature in more than four years. Bonds also sell for a minimum of $1,000 but have maturities of more than 10 years.

Five-year Treasuries ride the fence between safety and risk. Even if rates climb, they won't move up that much at the five-year level. The price of the security may move around a little bit, but not enough to offset a 6.5% yield for intermediate issues.

While long-term bonds are yielding around 7.9%, their rates are likely to drop. Going out on a limb with a 30-year bond is chancing greater price volatility. And you will pay a stiff penalty should you decide to sell it before it matures.

One advantage of Treasury bills is that they come in three-, six- and 12-month maturities. Treasuries are paying a little more than CDs. Three- and six-month Treasuries are yielding around 3.69% and 3.82%, respectively. The yield on three- and six-month CDs is about 3.47% and 3.67%, respectively. You may want to roll over the money to secure higher yields when rates go up. Deep-pocket investors may want to dish out $10,000 for the largest denomination Treasury bills.

Mortgage-Backed Securities And ARM Funds

Mortgage-backed securities--collateralized mortgage obligations, or pass-throughs on government guaranteed loans--allow investors to receive payments on the interest and principal of unpaid mortgages. But the government doesn't back the market value of the securities.

Since mortgage-backed securities sell for $25,000 each, you will probably be better off with a mutual fund that holds these mortgages. Right now, yields are averaging between 7.5% and 8% for 15- and 30-year terms.

The problem, however, is that good mortgages are being paid off, while the bad ones are going into debt. So, you don't know how long your yield will last with mortgage-backed securities. Also, the yield that is quoted may be based on historical data and not what the security is going to earn in the future.

Adjustable-rate mortgages (ARMs) are essentially short-term loans. Home owners take note: ARMs may be a good investment because of interest rates. But investors are faced with the possibility that the yields will eventually fall on these investments.

Utility Stocks

A good defensive stock in uncertain economic times, utilities are another option for securing higher yields. Utilities are made up of natural gas, electric, water and telecommunications companies. (See "A Wealth of Power, Light, Water," Personal Finance, July 1992.) Yields on electric and gas utilities hover in the 6% and 7% range.

While yields on telephone stocks are less, around 5.5%, emerging markets are expected to boost telephone company profits. So, yields may climb to the 7% level by next year. Moreover, telephone companies historically are among the most consistent dividend payers.

However, utility yields are not risk-free and, like bonds, suffer the vicissitudes of the market. As rates fall, their prices rise. The dividends of high-yielding utilities tend to grow if a company's earnings grow. If the current dividend of a utility is more than 60% of available cash earnings (or the company's profits), then future dividend growth seems probable.

Certificates Of Deposits

If you just can't handle fluctuations in price, keep your money in the bank. It is possible to find at safe banks and thrifts CDs that are yielding between 4.25% and 7.75%. You just may have to invest with an out-of-state financial institution to find such rates. However, this may make it harder for you to monitor the institution and your investment.

Even if you don't mind the inconvenience, you may not get the rate you see quoted. Some CD rates change daily. To find top-yielding CDs, you can subscribe to such industry newsletters as RateGram/RateFax (415-479-3815) or 100 Highest Yields, (800-327-7717).

Money-Market Mutual Funds

These are a select group of high-paying money funds. Normally, their portfolios are widely diversified and contain high-quality securities with very short maturities--usually 120 days or less. The returns on taxable and tax-exempt money funds average around 8% to 11%.

Moreover, these funds offer liquidity, which means easy access. You can write checks against your account or have cash wired to your bank. Unlike CDs and bank deposit accounts, money funds are not federally insured. Still, their risk is minimal.

Recommendations include: * Alger Money Market, (800-992-3863); * Vanguard MMR/Prime, (800-662-7447); * Kemper, (800-621-1048); * Strong Fund, (800-368-3863); * Fidelity Cash Reserves, (800-544-8888); * Dreyfus Worldwide Dollar Portfolio, (800-782-6620); and * Calvert Tax-Free, (800-368-2748).

Before you add any investment to your portfolio, first ask yourself whether or not you want to put your money at risk, and second, under what conditions you will or won't get a high yield. Just be aware that nothing from nothing leaves nothing. The natural state of affairs dictates that you cannot get high returns without risks.