Diversified Income Fund Approach Adds Safety : Investments: Strategy provides measure of protection in a time when warnings of risks abound.

If you’re looking to invest in mutual funds for income these days, you need a strategy.

Yields across the whole spectrum of funds, from short-term to long-term, that invest in interest-bearing securities are at their lowest levels in at least two decades.

Risks, to judge from a cacophony of warnings about the perils facing bond-fund holders, are running high.

Should interest rates suddenly turn upward, the resulting drop in bond funds’ net asset values could shock a generation of investors that has grown used to bull-market conditions.

It’s enough to send any cautious individual fleeing for the sidelines to await some “less risky” occasion to put his or her money to work.

But many income-minded investors--including a large percentage of retirees--don’t have the luxury of that wait-and-see option if they depend on income from their capital to cover their costs of living.

So they are pretty much forced to perform a balancing act between yield and risk, trying to wring the best possible return from their money while minimizing their exposure to misfortune.

One time-honored approach they can take to this dilemma is to diversify their income investments--not just among different issuers, but also in terms of time, type and quality.

If they opt to invest in mutual funds, they can pursue this mission on a do-it-yourself basis, or through specialized vehicles known as strategic income funds.

“Such funds typically diversify their holdings among U.S. government, international and high-yield debt securities,” notes Martin Skala, a senior editor at Standard & Poor’s Outlook investment advisory service.

“A major selling point for these funds is the risk reduction achieved through sector diversification,” Skala says in a current Outlook report.

“U.S. Treasuries, foreign bonds and high-yielding corporate bonds tend to move in different cycles, each possessing its own distinct set of risk and return patterns.

“High-yield corporate bonds, for example, are less sensitive to interest-rate swings than long-term Treasuries. On the other hand, they possess much greater credit risk.

“Foreign bonds generally provide higher yields than comparable domestic issues, but are subject to currency fluctuations.

“Blending the three types in a single portfolio lessens share price volatility without significantly reducing a fund’s income stream.”

Among the more than a dozen funds that operate along these lines, most are sold with loads, or sales charges, in the 4% to 5% range. Among the no-load choices are the Blanchard Flexible Income Fund and the T. Rowe Price Spectrum Income Fund.

The Spectrum fund operates simply by investing with no extra fees in a mix of seven other Price funds that range from the Prime Reserve money-market fund and the short-term bond fund to the company’s equity income fund, as well as government, international and high-yield bond funds.

Each strategic-income fund has its own personality. Managers of some like to stick with an even mixture of bond types, while others may emphasize, say, high-yielding “junk” bonds or internationals.

So they aren’t generic products, nor are they absolutely insulated from market shocks.

“Diversification does not eliminate risk,” T. Rowe Price points out, “but it certainly reduces your exposure to the extremes of performance.”

It doesn’t take much study of how fund managers themselves pursue “strategic income” missions to see that you can take the same kind of approach on your own, provided you want to tackle the job and have enough capital to diversify among three or four funds, at a minimum.

A do-it-yourself plan allows you to make your own decisions about where to allocate your money. It also holds out the hope of a slightly higher return, in some cases, through saving on fund expenses.

Notes Skala, “Because of their need for special investment expertise, the strategic income funds tend to have somewhat higher expense ratios.”