CD or Mutual Fund (or other?) for funds used in guardianship?

Friend of family had her grandmother slip into a stoke last year. The grandmother is totally handicap now and the granddaughter assumed guardianship. Her property was sold and the money was put into a savings account - a fairly sizable amout of cash ( over $250k). When I discovered how low the intrest rate was I got a little mad at her. But what would be the best investment approach? She needs to keep some of the funds liquid for paying grandma's care bills and obviosly she can assume a heavy risk burdon with he cash. Some CDs look attractive at 5% but some mututal funs are out-performing that right now. Any suggestions?

bad edit - she CAN'T assume a great risk burden.

For low risk investments, there are 3 good options:

1) CDs
2) Money Market accounts
3) Short-term bond mutual funds

The problem with CDs is that each bank will only insure up to $100,000 through the FDIC. So, if you go with bank CDs, you will want to split the money into 3 different banks, so as not to exceed the 100 thousand limit.

Money market accounts are comparable to CDs, especially since the main securities that these funds purchase are bank CDs and Treasury bills. With a money market account, you get yields about the same as bank CDs, but with the ability to reinvest the interest every month when the interest is paid out. Also, most money market accounts have a check writing feature for checks above $250. Money market accounts only invest in ultra-short term bonds of very high credit quality, so there is almost no chance of losing money in them. To date, no single investor has lost money in a money market account (according to Eric Tyson, author of Mutual Funds for Dummies).

Short-term bond funds are not very susceptible to interest rate changes. Most of the time you get a slightly higher yield than with money market accounts, at a slightly higher level of risk. And, many short-term bond funds have the check-writing features as well. You can pick a fund with a duration of 1 - 2 years and be assured of very low risk. The only thing is that when you redeem shares, you will have to calculate a capital gains tax for your tax return. Money market accounts, on the other hand, always keep their shares set at $1, so there is never a capital gains tax to compute. Therefore, money market accounts are easier to deal with at tax time. (Note: you will still pay taxes on the interest with either type of account, unless you get a tax-exempt money market account which invests in municipal bonds).

When it comes to lending investments like money market accounts and bond funds, the yields on the bonds themselves are extremely competitive. In other words, one money manager is not going to find bonds that pay significantly more than another manager will. Therefore, costs become the single most important factor when selecting your money market account or short-term bond fund. Academic studies show this extensively.

For the lowest-cost money market accounts and bond funds, go with http://www.vanguard.com . They just released a study showing how Vanguard's money market and bond funds beat out all other competitor's over the last 10 years, in terms of total return. The conclusion was that their low costs were the reason for the dominance.

One last thing: Unlike banks, it is impossible for a money market account or bond fund to go bankrupt. Mutual funds like these are required to keep a dollar's worth of securities on hand for every dollar invested. In contrast, banks only keep about 15 - 20% of their money on hand, with the majority lended out.