Cash Alternatives: Beat the Bank by at Least Two Points

Mutual Funds

Cash Alternatives: Beat the Bank by at Least Two Points

The best interest rate you can get nowadays without taking any risk whatsoever is the 1.5% that some online savings accounts offer. Most banks pay less. The ideas in the accompanying article are designed for investors who are willing to take some chances or who need high income to cover living expenses. If those suggestions are too risky for you but you still want more than the bank provides, consider two alternatives that each yield 3.5%.

One is a fund that invests in floating-rate bank loans, which are generally made by banks to corporations with middling to shaky finances. Interest rates on these loans usually reset every one to three months, with banks charging a premium above a designated short-term benchmark. Because the rates float, the values of these loans usually hold up, and may even increase, when rates rise. Our favorite fund in this category is Fidelity Floating Rate High Income (symbol FFRHX). The fund didn't escape the credit crisis, losing 16.5% in 2008. But it returned 28.9% last year and lately has been exhibiting the kind of stability that used to be one of its hallmarks.

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Ginnie Mae mortgage securities are as safe as Treasury bonds. That's because Ginnies are backed by the full faith and credit of the U.S. government. Ginnie Mae funds can lose money when rates rise, but they generally carry below-average risk, roughly between that of short-term and medium-maturity bond funds. Our choice is Vanguard GNMA (VFIIX). It earned a nifty 7.2% in 2008 and hasn't had a down year since 1994.