Some mutual fund managers are taking advantage of the beaten-down prices in the market, turning to higher-risk bonds, such as junk bonds and loans backing highly leveraged takeovers, along with mortgage-backed securities and REITs.

“A lot of investors have been wanting safety—call it the flight to quality or liquidity—but when you can go counter to that, you have opportunities,” said Edward Perks, manager of the Franklin Income Fund. “For us there’s been a tremendous expansion of the opportunity set. Investment-grade mortgages have gotten sucked down with sub-prime. We think the market is treating it in too broad a brush.”

But less-experienced retail investors have been fleeing risky investments, pulling $2.4 billion from junk bond funds in the three months through July and putting $15.7 billion into intermediate-term bond funds, five times the amount they put into them in the same period of 2006.

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