Savers have been under siege this year. Trying to find returns that beat inflation in a time of record gasoline and home-heating prices...

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Savers have been under siege this year. Trying to find returns that beat inflation in a time of record gasoline and home-heating prices has been a losing battle.

With the raft of Federal Reserve interest-rate cuts, you are lucky to break even on current savings yields once you subtract inflation and taxes.

The highest insured certificates of deposits less than one year in maturity are yielding no more than 3.6 percent. Bank money-market funds have slightly better returns, but not much.

You will have to leave the U.S. and accept more risk to find a respectable return on an income vehicle. Several mutual funds offer robust returns and some diversification benefits.

Think long term

The key to this non-U.S. savings strategy is to think long term and beyond federally insured CDs and money-market funds.

Moving away from the insured realm, of course, means your principal won’t be guaranteed by any federal agency, and you will be subject to currency risk. If the dollar rebounds, the value of these investments will fall.

Although you gain some measure of safety in a mutual-fund portfolio, issuers sometimes default and don’t pay bondholders. That’s why diversified holdings, not single bonds, make the most sense for individuals.

There are only a few mutual funds that do a good job of managing non-U.S. bonds at a low cost.

Top of my list would be the American Century International Bond Fund, which rose almost 10 percent in 2007, according to data compiled by Bloomberg.

Almost 70 percent of this fund is in government securities overseas. During the past five years, it has bested about 80 percent of its peers.

Also worth considering is the T. Rowe Price International Bond Fund, also up 10 percent last year. Their managers may invest as much as 20 percent in “below investment-grade, high-risk” bonds.

Keep in mind that recent returns have looked rosy mostly because of the dollar’s descent. That won’t always be the case.

And, just because you are buying a package of mostly non-U.S. government bonds doesn’t mean you can’t lose money. They are subject to market forces and currency fluctuation.

The American Century fund, for example, lost 8.2 percent in 2005. All such funds will slump if the dollar rallies or interest rates climb in the countries where the bonds are offered.

You might obtain some insulation from a fund that also invests in U.S. bonds, such as the Pimco Foreign Bond Fund, which has almost half of its portfolio in American debt securities. Yet that’s not a guarantee against losses as the fund fell about 9.5 percent three years ago.

Judging risk

The best way to gauge income risk is to evaluate your vulnerability to a loss. Are you saving for college bills a few years away? Then you might need the security of CDs or an insured money-market fund.

Saving for an imminent retirement? Then I-bonds or their cousins, Treasury Inflation-Protected Securities, might be right for you.

No matter your risk tolerance, a funded short-term savings portfolio will provide a bulwark against emergencies and the unabated surge in the cost of living. It’s like a mini-insurance policy you can cash in when you need it most.