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Best and worst investment ideas for 2014

Best investment ideas: Bank-loan funds
Best investment ideas: Bank-loan funds © Pete Spiro/Shutterstock.com

These are mutual funds and exchange-traded funds, or ETFs, that contain loans made by banks to highly leveraged companies -- generally companies with below-investment-grade ratings. That makes yields appealing. Many are now higher than 3.5 percent.

Moreover, the payout rates float. So if interest rates appreciate, the funds' payouts will, too. "We're looking for higher rates," says Lou Stanasolovich, CEO of Legend Financial Advisors in Pittsburgh.

"We like (bank loan funds) except in the case of a recession or liquidity crisis like 2008-09. As long as the economy doesn't weaken too much, they should be in fine shape," Stanasolovich says. "Even compared to bonds, bank loan funds offer stable, superior returns in a rising-interest-rate environment."

While some risk arises from the low ratings of the loans in the fund, they are generally senior secured loans, Stanasolovich says. That means the loans are among the first to be paid if the companies go under, and the loans are backed by collateral.

If you're going to buy a fund, Stanasolovich recommends an open-end mutual fund over a closed-end fund, or ETF, because the open-end funds have more liquidity.

However, be warned: Because the funds' loans are predominately below investment grade, some financial advisers say these funds carry more risk than is appropriate for the average investor.

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