telegram.com (March 28, 2008 5 am) --     Have you been messing with your cash? Howls are arising from investors who parked liquid funds, or funds they expected to be liquid, in auction-rate securities that are now locked down. Others bought “near” money-market funds that weren’t “near” enough.

Most likely, you chose these securities because interest rates in the money markets are so low. Yields at 2.5 percent or less can wreck your day. The various money-fund substitutes have been offering 3 percent to 5 percent on cash, while apparently preserving capital, too.

But reaching for higher yields always involves risk. Before pulling the trigger, you need to think about what, exactly, cash means to you.

If you are allocating part of a long-term investment account to something reasonably safe, near-cash securities work fine. You might make a little or lose a little. Either way, it won’t affect how you live your life today.

It’s another matter entirely if you need your cash to pay taxes next month, cover living expenses, make a new investment, dispense charitable contributions or meet a payroll. For these uses, the return on your investment is irrelevant. Only safety and liquidity should rule.

“The mentality of a cash manager is antithetic to the mentality of an investment manager,” says Bruce Bent, inventor of the money fund and chairman of the Reserve, a New York-based cash-management company. “The investor fights to earn 0.01 percent more than the competition. The cash manager wants safety, liquidity and a reasonable rate of return. You want to be bored into a good night’s sleep.”

A reasonable return is whatever plain-vanilla money funds or bank money-market accounts will pay. It doesn’t matter that your cash account loses money after taxes and inflation. It is not — repeat, not — an investment and shouldn’t be judged as one. It’s a payment account for the money you need on hand. That’s all.

All money fund sound-alikes carry risk. Take the cash-plus and enhanced-cash funds peddled mainly to businesses and institutions but available to individuals, too. You might earn an extra 0.15 percent to 0.75 percent in yield but you’re giving up safety of principal. General Electric Co.’s Trust Enhanced Cash Trust returned its public investors money last November at a 4 percent loss.

The more aggressive ultra-short bond funds typically yield 1 or 2 percentage points more than money funds. As a group, they’re down 1.4 percent this year, according to Morningstar Inc., which tracks the industry. A few of them are disaster areas. Schwab’s YieldPlus Fund is down 16 percent since January percent — this, for a place you were supposed to be able to park your cash.

“Assets are flying out of these funds,” says Connie Bugbee of iMoneynet.com, which follows money funds. Their market values may recover but losses this large aren’t what investors had in mind.

Worst case, for investors managing cash, are auction-rate securities. If you bought them, odds are that you didn’t know how they worked, so here’s a primer:

The story starts with closed-end mutual funds. These funds sell common shares in a managed portfolio of stocks or bonds. The shares trade on an exchange, like stocks.

They may also issue preferred shares, which usually don’t trade on an exchange. The preferreds provide leverage. The net proceeds from their sale are used to buy more securities for the fund, whose returns increase the yields that the common shareholders earn.

The preferred shares often come in the form of auction-rate securities. They’re perpetual investments with no fixed maturities but with short-term renewal dates, often once a week. Because of their long-term nature, they pay higher dividend rates than you get on cash.

The fund pays the dividends, recently in the 3 percent to 5 percent range. At every renewal, your shares go up for auction. You could either re-up at the current dividend rate or sell your shares to a new investor. Your money was locked up for only seven days at a time. Or so you thought.

When the markets seized up, new investors quit bidding for these preferreds. Existing shareholders couldn’t sell. Their money is safe. In fact, they’re earning a slightly higher dividend rate than they did before. But they may be stuck with those shares for months or even years.

A few taxable funds have said they’re borrowing money to buy out the preferred shareholders, in whole or in part. Among them: Aberdeen Global Income Fund, three Eaton Vance funds, five Calamos funds, 13 Nuveen funds and two ING funds.

That’s not so easy for the tax-exempt closed-ends. If they borrow at the higher rate applied to taxable debt, they may hurt the common shareholders, says Anne Kritzmire, a managing director at Nuveen Investments. Nuveen hopes to develop a new form of preferred share that will do the job but it will take time.