(MONEY Magazine) – Finding the stock market's ride too wild? Then consider parking some of your portfolio in convertible securities. A cross between a stock and a bond, a convertible pays interest but can be swapped for the issuer's common stock at any time. Generally, convertible bonds and convertible preferred stock (the two basic types) gain two-thirds as much as their underlying equities when stocks rise. But they generally fall half as much when stocks decline because of generous yields (recent average: 4.4%).

The big threat to convertibles is rising interest rates, which hurt the value of convertibles' underlying common shares and also make their yields look less attractive. But over long periods that encompass both bull and bear markets, convertibles hold their own. From December 1989 through December 1998, for instance, the Merrill Lynch all-U.S. convertible index gained an annual average of 13.2%, vs. 17.9% for Standard & Poor's 500 index and 12.5% for the Russell 2000, while showing 30% less volatility than the S&P and 40% less than the Russell.

Last fall, troubled hedge funds seeking to raise cash unloaded convertibles, pummeling prices. Convertibles have since bounced back a bit. "But they remain attractively priced," says Ravi Malik, a money manager at Froley-Revy Investment, which oversees $2.1 billion in convertible securities mostly for institutional investors. T. Anne Cox, head of convertibles research at Merrill Lynch, says that convertibles are trading at a slightly greater than normal discount to their theoretical fair value (a complicated formula that is Wall Street's standard way to evaluate convertibles). And since 70% of these securities are issued by small and medium-size companies, convertibles also offer investors a cautious way to get in on the budding rally in small stocks.

For most investors, it makes sense to purchase convertibles via mutual funds. These securities are tough to assess, and you need at least $75,000 to build a diversified portfolio. But for an initial investment of as little as $500, you can find a solid fund that provides diversification and professional management.

When comparing the 25 open-end and nine closed-end convertible funds available to individual investors, we focused on low expenses and safety. Following the advice of Jon Hale, an analyst at Morningstar, we avoided funds that keep more than 20% of their assets in ordinary equities. We sought funds with securities rated BB or better, on average, and with expense ratios lower than the category norm of 1.54%. Three strong performers met our criteria. Calamos Convertible, which carries a 4.75% load, is the top convertible fund over the past five years. Among no-load funds, an attractive choice is Northern Equity Income, which ranks in the top 25% of convertible funds over the past three years. Finally, we suggest Ellsworth Convertible Growth & Income, a closed-end fund that trades on the American Stock Exchange under the ticker symbol ECF. Ellsworth specializes in large-cap convertibles, making it a tad less volatile than its peers.

--SUSAN SCHERREIK