Low interest rateshave worked wonders for debt-ridden consumers. For those who have cash they need to invest, however, low rates are causing a bunch of problems.

Although stocks have historically given investors the best returns over the long haul, putting money you'll need within the next few years in the stock market exposes you to huge amounts of risk. If your timing's bad, then you could run into the brick wall of a bear market and have to sell at exactly the worst time.

That's why many savers stick with less risky investmentsfor their short-term savings. Yet with many low-risk savings vehicles having seen their income dwindle to almost nothing, some are jumping into alternatives that are riskier than they probably think.

The falling money-market fund
Perhaps the easiest way to set cash aside is through a money-market mutual fund. Currently, investors have a staggering $3.5 trillion set aside in money-market funds.

Yet according to the Wall Street Journal, many savers have fled the safety of money-market funds in search of higher rates. That's not hard to believe, given that top-yielding money market funds are paying out only 0.6%, and most clock in at less than 0.25%. Faced with a paltry $20 per month income on $100,000 in savings, many are making the classic mistake of buying longer-term securities like bond funds at what may prove to be exactly the wrong time.

The troubles of bond funds
Bond fundshave two major problems. First and foremost, unlike money-market funds and other similar fixed products like bank CDs, bond funds expose you directly to interest rate risk. If interest rates rise -- which looks like an increasingly likely propositionin the near future -- then bond funds will drop in price. And unlike a bond you own directly, a bond fund doesn't give you the option to get back your full principal at maturity; you could be stuck with that loss.

In addition, the investments that some bond funds make aren't nearly as safe as a bank CD or money-market fund. For instance, take a look at the Vanguard Short-Term Corporate Bond Fund (VFSTX). It has an average maturity of about 2.5 years and currently yields 2.79%. But take a look at some of the companies whose bonds the fund owns:

Company

Value of Bonds Held

Alcoa (NYSE: AA)

$22.7 million

Bank of America (NYSE: BAC)

$228.1 million

Citigroup (NYSE: C)

$261.1 million

MGM Mirage (NYSE: MGM)

$10.2 million

Pfizer (NYSE: PFE)

$116.6 million Continued...