For openers, when you talk about mutual funds, keep in mind that you are talking about basic money -- bank-account-and-bonds-type money, the kind you expect to be there when you want it. Mutual funds are not in the same investment category as that hot little company that might some day blow the lid off the monoclonal antibodies market.

That said, a few eye-openers are in order, if only because mutual funds still have a reputation as soporific slow-movers fit for the belt-and-suspenders set.

In the first eight months of this year, for example, the top 10 mutual funds all increased in value more than 35%. The leader, First Investors Discovery, went up a whopping 58%. A basic rule of investing: Never scoff at anything that can turn $10,000 into $15,800 or even $13,600 in eight months. Particularly when the same $10,000 parked in an 8% bank account or money-market fund would have left you with, perhaps, $10,500.

Over the longer term -- the last seven years, to be exact -- $10,000 put into a relatively conservative group of mutual funds (and moved around a few times, according to a simple system) would have grown to a strapping $66,700. A million dollars would have become $6.7 million.

To be sure, a bull market like the one that began in August 1982, showers its bIessings on everybody and everything, mutual funds included. It also skews the performance numbers upward. What is interesting about the funds, though, is not just that they let you buy into a rising market but that they have evolved so many different ways of putting money to work. Pay a little attention to your mutual-fund investing and you should turn a decent profit, whether the market is moving up, down, or sideways.

The fundamental rationale for investing in mutual funds rather than picking your own stocks and bonds is the same as it has always been. On your own, it takes time and good luck to pick winners consistently, let alone to gauge when to buy and sell. Buy a mutual fund and you are hiring a pro to do it for you. You get builtin diversification no matter how small your holdings, and you can get at your money quickly when you need it.

This rationale pales a little when the market takes a dive. That is why the highflying equity funds of the 1960s lost so much of their luster (and so much of their shareholders' money) when stock plunged in the early '70s. Rather than just watch the money flow out, however, a few clever fund managers decided to apply the mutual-fund concept to a class of investments -- short-term paper and other money-market instruments -- that weren't doing badly at all. Soon, every mutual-fund organization worthy of the name was offering a money fund, and investors were flocking back.

To the fund managers, there was a lesson here. If one new kind of fund was good, why wouldn't two new kinds of funds be better? Or six? By the early 1980s, fund families had proliferated. Fidelity Group, in Boston, was, at last count, offering 26 distinct mutual funds to individual investors. Merrill Lynch, Pierce, Fenner & Smith had 17, and Investors Diversified Services had 14.

Each fund in one of these families has a defined objective, and many specialize in specific sorts of investments designed to reach that objective. Willing to live with risk in hopes of making a killing? That is where the go-go "performance" or "aggressive-growth" funds like First Investors Discovery come in. The venture capitalists of the fund industry, these funds specialize in finding small, but promising, companies and riding their stocks up the growth curve. Below them on the risk-and-reward scale are "growth" funds (they buy the likes of Exxon and IBM), "growth-income" funds (more Exxon and IBM, plus some preferred stocks), and plain old "income funds" (high-dividend stocks and debt instruments). Sprinkled throughout are special industry funds (health care, precious metals, and the like) and special-purpose funds (tax-exempt bonds, options).

Most fund families like to advertise the ease with which you can move from one fund to another within a family. All it takes, many say, is a toll-free call. It is often equally easy, although not so widely advertised, to move from one family to another. In the old days, you might have bought a well-performing mutual fund and let your money sit there. That was risky, in that a fund's performance in one period rarely indicates how well it will do in the next. These days all you need to care about is what is doing best right now. Then you let your fingers do the moving.

Fund management of this sort isn't as hard as it sounds, especially since a whole subindustry (see "The Advice Business," page 212) has evolved to keep tabs on the various funds' performances. Burton Berry, for example, publishes a monthly listing of funds in his newsletter, NoLoad Fund*X, with the top five funds in each category starred. He suggests that subscribers buy a top-rated fund, then drop it for the new leader when the previous fund falls out of the starred category. According to Janet Brown, the newsletter's managing editor, this system would have produced a 567% gain over the past seven years for funds in the long-term-growth category (that is where that $66,700 figure came from). Yet subscribers would have had to move their money only once every 10 or 11 months on average.

Any fully invested equity fund, of course, will ride with the market, and the biggest winners in a bull market are likely to lose big in a bear. To protect yourself suggests Paul Reed, editor of a newsletter, UnitedMutual Fund Selector, get into funds like American General Pace or Security Ultra, which aren't afraid to build market looks bleak, or look for a fund like NEL Growth, which has a low-volatility portfolio.

An alternative, of course, is to begin moving your money out of stocks altogether and into bond funds or money funds. Probably the simplest system for this kind of market timing has been devised by William E. Donoghue, author of William E. Donoghue's NoLoad Mutual Fund Guide. The stock market, Donoghue argues, is likely to move in the opposite direction from interest rates and, in particular, away from the average rates available on money-market funds. When the money-fund average is below 10%, he says, put your money in an aggressive growth stock fund. When it is between 10% and 13%, begin moving into a money fund, and at anything over 13%, keep it all there. Applying this system for the past five years, according to Donoghue, would have gotten the investor a 23% average annual return.

Smaller equity funds frequently outperform larger ones in a bull market, simply because they can invest more easily infast-growing small companies without upsetting the stock-price applecart. Don't however, be too quick to jump into a fund's initial offering. Apparent winners like Merrill Lynch's Sci/Tech Holdings Inc. fund, introduced last March, attract millions before they even set up shop. But they may or may not work out. "You are going in," says Paul Reed, "on a wing and a prayer." For further protection, split up your fund holdings. Reed and many other advisers recommend that larger investors, in particular, own shares in three or four different funds, each with different portfolios and objectives.

Finally, look for a no-load fund. Load funds, usually sold by brokers and other salespeople, carry a sales charge as high as 8.5%. Since that gives you only $915 for every $1,000 you invest, the difference mounts up over time. "An investment that appreciates 40% will give you a 40% return with a no-load fund," points out Meryl Kahn, a financial planner with Moneyworks Inc. in Boston. "A load fund with a commission of 8% will give you a return on the same investment of only 28.8%." Especially if you are going to be moving your money around, you don't want to pay a sales charge each time. Moreover there is no measurable difference in performance between load funds as a group and no-loads as a group.

How to find a no-load fund? Watch your mail for fliers, and read newspapers and magazines. It is a competitive business, and the no-loads are advertising heavily. Among the larger, better-established no-load families are those managed by Dreyfus Corp. (New York), Fidelity Group (Boston), Scudder Stevens & Clark (Boston and New York), Stein Roe & Farnham (Cbicago), T. Rowe Price Associates (Baltimore), and Vanguard Group (Valley Forge, Pa.).

Keep an eye out, however, for a few cute innovations, such as miniloads (sales charges of 3% or so, recently introduced by a few hot-selling funds like the Fidelity Magellan Fund), and redemption fees (a percent or two assessed when you take your money out). Given the option of paying some money or paying no money -- need it be said? -- you are better off with the latter choice.

Winners & Losers

The best and the worst mutual funds for two periods: the first eight months of 1983, a bull -- market time for stocks, and the same interval last year, when stocks were flat and bonds were rising. Moral: The fund that looks good today may pale when its market turns around.

1983 (January through August)

First Investors Discovery +57.9%

Delta Trend +57.0

Fidelity Select Technology +51.0

Twentieth Century Ultra +38.6

Eberstadt Energy Resources +37.9

Lexington GNMA Income + 1.3

Fidelity Government Securities + 1.2

ISI Income + 1.1

NEL Income + 0.6

Loomis-Sayles National + 0.4


Standard & Poor's 500 Index +20.2

1982 (January through August)

IDS Progressive +33.7%

Federated Tax-Free Income 30.3

Scudder Managed Municpal


Fund for U.S. Government

Securities +27.9

Oppenheimer Tax-Free Bond +27.1

Fidelity Select Energy -20.9%

Japan Fund 21.6

Sherman, Dean -21.9

American Investors -34.8

Ebserstadt Energy Resources -36.8

Standard and Poor's 500 Index + 1.2

Source: United Mutual Fund Selector. Performacne figures include dividends and capital gains.