Boston — Let's say you invested $10,000 in a Fidelity Cash Reserves fund a year ago. Last September, 30-day interest rates were 17.10 percent. Over the year you earned about $1,540, that is, a 15.4 percent return.
Suddenly stocks and bonds go roaring away. Short-term interest rates have fallen to 13.5 percent.
And there you are, paddling around in your money market fund.
You don't have to ride in anyone's wake, however. Often, with a phone call, you can switch into a stock, bond, gold, or tax-exempt mutual fund. And more investors are doing so.
If most everyone who had a money market fund account did make such a phone call, the mutual fund groups would be swamped with cash for fresh investment. But this is considered unlikely. Relatively unknown until the mid-1970s, money market funds now have over $220 million in assets, or 80 percent of all mutual fund assets, according to Harry J. Guinivan of the Investment Company Institute, the mutual fund industry's trade association. In the summer of 1980 only 4 million money market accounts existed. Now there are over 13 million.
Many people with money market funds don't realize they can easily diversify. For example, if you bought into Fidelity's Cash Reserves, managed by one of the nation's largest mutual fund groups, you have 24 other funds to choose from. You could go with riskier high-growth stocks, more conservative high-income stocks, or tax-exempt municipal bonds.
If you have invested in a money market fund, it's likely you have access to other types of mutual funds. According to Mr. Guinivan, about 95 percent of the money market funds are part of a fund complex.
''Mutual fund groups have had to create their own money market funds if they didn't have one,'' he observed. ''They couldn't afford to be left behind.'' Last December there were 159 money market funds. Now there are 245.
Some of the larger and more diversified fund families include: American Funds; American General Capital; Dreyfus; Eaton & Howard, Vance Sanders; Federated Securities; Fidelity; Investors Diversified (IDS); Kemper; Merrill Lynch; Oppenheimer; T. Rowe Price; Putnum; Scudder Fund; Vanguard; and Value Line.
Switching between funds is like finger painting: Once you get your hands dirty, it's relatively simple. Generally, you merely read the prospectus of the fund you are moving to, send a letter saying you have read the prospectus and are authorizing the exchange, and pay a $5 bookkeeping fee. If you are switching from a no-load (commission-free) fund into a load-fund - usually with a brokerage commission of 8.5 percent - you will be charged a fee on the amount of money you move.
You will also have to pay capital-gains taxes. A provision shortening long-term capital gains from one year to six months was struck from the Tax Equity and Fiscal Responsibility Act of 1982, passed in August. But it may make it through on the next round. That would allow you to transfer your money from one fund to another after only six months and pay the lower long-term capital gains tax of 20 percent.
Most fund managers will not encourage you to make switches. First, they do not want to be responsible for a bad move. More important, however, is the disruption a large amount of switching causes.
''If money is flowing in and out of the fund,'' explains Erica Diesel at Vanguard, ''the portfolio manager can't make a big buy when he needs to. Switching hurts the performance of the entire portfolio.''
Nonetheless, switching is hot. According to James Schabacker, publisher of Switch Fund Advisory, the average subscriber to his newsletter moves his investment between three and six times a year.
During the mid-August surge in the stock market, Victor Kramer of Fidelity noticed ''a striking acceleration'' of money being transferred from money market accounts to tax-exempt bond funds.
''The quickest to move are the high-income, sophisticated investors. If interest rates keep falling and the stock and bond markets keep rising, corporate bond funds and stock funds will follow suit - but at a slower rate,'' he adds.
Richard Vesely of Delaware Management Company disagrees. He says that Delaware Management has greatly increased its advertising campaign to increase its cash reserves (money market funds). ''I'm calling it, 'The sky is falling' club,'' he remarked. ''We have had no indication that money market funds are dropping off. Most of these people are savers who want safety and income, not investors who want to take risks. They won't switch, and they shouldn't.''
But according to Mr. Schabacker, now is the time to be in equity. On Aug. 21, he advised his subscribers to move all of their money out of cash securities and into equity. Previous to that he recommended 75 percent equity and 25 percent cash.
Mr. Schabacker uses what he terms an analytical forecaster to determine general trends in the market. He looks at indicators such as the Standard and Poor 500 average, the prime rate, and the business activity rate. Within that average, he makes specific recommendations for individual funds. ''Say we are recommending 50 percent equity and 50 percent cash at a particular time. If Value Line equity fund has good upward momentum,'' he says, ''we'll be a trend follower and switch another 25 percent away from cash reserves and into equity.''
Mr. Schabacker cited the Bull & Bear Group as an example. If an investor had started in the group's gold fund in May 1980, then switched to its growth (stock) fund in January, and finally to its cash (money market) fund in September 1981, he would have seen his investment appreciate 45 percent. That's 27 percent a year as compared with 10 percent for the Standard and Poor 500 average.
The elegance of Mr. Schabacker's system is its conservatism. It follows trends rather than predicts them.
This theory parallels that of another well-known switch advisory service, Dick Fabian's Telephone Switch Newsletter. He rides the market up, keeping money in a fund as long as the current price is above its average for the previous 39 weeks. He hops off when the price drops below its average. By using this system and keeping alert, you shouldn't be caught holding the bag if the fund goes sour, he maintains.
A person usually invests in mutual funds for two reasons. First, he wants to spread his risk by diversifying into many different stocks but doesn't have $200 ,000 to throw around. Second, he is not a professional stockbroker and doesn't have time to become one. It's important to remember why you are in your present mutual fund before hopping to another, financial planners say.