Today, with Treasury and other long-term bonds and funds looking even riskier than they did a few weeks ago (see “The Risk in Buying Bonds Now”), risk-free cash-type accounts are the place to be for the fixed-income portion of your portfolio. Unfortunately, money-market funds pay 1.5% and CDs little more. Are there higher-yielding alternatives?

Here’s one from my personal files: the so-called stable-value fund. Mainly for diversification, but also for safety, I have allocated virtually all of the assets of an insurance-company-sponsored 401(k) plan (the plan offered by the employer I left to rejoin Kiplinger’s in 2000) and half of the insurance values of a cash-value policy I own to a stable-value fund. My fund has a sweet one-year return of 5.2%.

Where do you find this kind of fund if you aren’t the owner of a life insurance policy? And how can it return 5% today, a yield comparable to intermediate-term Treasuries or mortgage-backed securities, with practically no risk?

How stable-value funds work

Stable-value funds are an insurance company invention (though banks and brokerages also run them) that own fixed-rate “guaranteed investment contracts.” This debt is usually backed by a super-sound borrower like Freddie Mac or a leading bank or life insurer. The issuer contracts to borrow at a fixed rate for a term of around five years, using the proceeds to finance its own lending.

These guaranteed contracts do not trade freely like bonds, so their market values fluctuate little unless interest rates gyrate wildly. A stable-value fund holds a portfolio of guaranteed contracts at different rates and maturities. The fund charges expenses and passes the rest of the income to the investors. The net asset value stays fixed, normally at $10 a share.

Why aren’t these things more familiar? The main reason is that for most of the 1990s and so far in the 2000s, bonds have had the advantage by providing both capital gains and interest income. For the past five or ten years, a good bond fund that, say, tracks the Lehman Brothers long-term government bond index has rewarded you far more than a portfolio with a fixed return of 6%.

Now, with Treasury yields at 4% or 5%, the guaranteed contracts look great. But they are still almost entirely an institutional investment, available to pension fund managers and sponsors of 401(k) plans, and through variable life insurance or annuities.

How to get a piece of the action

I poked around and learned that some mutual funds invest in guaranteed investment contracts -- getting you a fixed share price, high yield and very low risk. The catch is that unless you have a fortune to buy institutional shares, you must invest via an IRA.

An example of a stable-value mutual fund is Gartmore Morley Capital Accumulation Fund (NMIRX; call 800-848-0920 or 800-637-0012 for a prospectus). The name sounds like it could be anything, but it’s a stable-value fund, quoted at a fixed $10 a share and available for IRAs for a minimum investment of $1,000. (Non-IRA accounts require $25,000 and are limited to institutions.)

As of mid August, the seven-day yield was 4.1%. That’s disappointing, but it reflects an expense ratio of almost 1%, which isn’t a shock because this isn’t a fund sponsor that tries to mix it up with Fidelity and Vanguard. Brokers and advisers are the usual buyers, and they must be paid out of a 12b-1 fee.

That said, the fund is a near-riskless investment paying as much or more than a ten-year Treasury. Moreover, the stable-value fund’s yield will rise as interest rates move higher -- as older contracts mature and the fund acquires new investments at higher rates -- and it will do this without any erosion in your principal.

So if war or budget deficits drive Treasury and mortgage yields up, stable-value funds will be even better as defensive investments. My 401(k) will always have a leg up on the fund because of the lower expenses, but that’s the only hole I can find.