Income funds offer investors refuge from volatile stock markets

``A lot of people still think they're being whipsawed by this market,'' says Walter Morris, portfolio manager for the Strong Income Fund in Milwaukee. ``It seems like every time you think you've got a trend figured out, the market goes 100 points the other way.'' Antics like that are enough to send many investors running for cover. Even though the Dow Jones industrial average has recovered a few hundred of the points it lost last October, many investors still aren't too happy about the way it's gotten there. A one-week movement of 100 points in one direction followed by a similar move the other way have become commonplace. All this volatility has sent investors scurrying for more predictable places, like money-market funds, high-grade bond funds, or out of the market altogether.

But some of those who are staying with the market are taking a closer look at income investments, particularly income mutual funds. Because these funds emphasize income, and not growth, they tend to invest in corporate and government bonds and stable, dividend-paying stocks that mirror the overall market. Although their prices may fluctuate, their income streams remain fairly predictable. But there are some risks to keep in mind here, as well.

``People are throwing up their hands and going for the high yields'' of income funds, Mr. Morris says.

His fund's assets, for instance, have grown from $137 million to more than $160 million since Jan. 1. The fund concentrates on high-yielding corporate bonds, sometimes called ``junk'' bonds, either because they carry a below-investment-grade rating from one of the major rating services, or they don't have any rating.

``We've seen a fair amount of movement into our bond fund, our growth and income fund, and other things that offer an income component,'' says Susanne Mahoney, vice-president for marketing at Fidelity Investments in Boston. ``I think people are looking for safety and stability with possible capital appreciation as well.''

So far this year, she says, Fidelity's Equity Income Fund has posted a total return of 19.09 percent. By comparison, the company's United States Government Reserves Fund has a yield of 6.56 percent.

``After the [October] crash, people initially jumped into money-market funds,'' Ms. Mahoney says. ``Currently, the yields on money funds are running 6 to 7 percent, and I think some of those people are starting to get their feet back in the water and think about getting into something with a little bit better return.''

For instance, Mahoney notes, Fidelity has seen more investor interest in a new offering called the Utilities Income Fund. It's a fairly defensive fund that invests in utilities with a long history of regular dividend payments, she says.

The interest in income is perfectly understandable, says Lawrence J. Gitman, professor of finance at Wright State University in Dayton, Ohio. Though there is still a chance for a bigger gain in a growth investment, he notes, ``the market's been so volatile lately, it's probably wiser not to be in there for growth. You can really get creamed.''

Dr. Gitman is co-author of ``Invest-ment Fundamentals, A Guide to Becoming a Knowledgeable Investor,'' (New York: Harper & Row, 433 p. $24.95, hardcover).

Although income funds and other investments may be a safer route in times like these, Gitman notes, they have their risks, too.

``One of the risks you face when you get into fixed-income securities, where you're talking about bonds, is that you're subject to interest-rate risk,'' Gitman says. ``If interest rates rise, the bond is going to sell at a discount, and you'll have a capital loss.

``And if you're talking about common stocks [for income], well, dividends aren't contractual; you don't know whether you're going to be paid.''

Another risk is a possible change in investment strategies because of the tax laws. The 1986 Tax Reform Act eliminated the special tax break for capital gains, putting income on a par with capital gains from a tax standpoint. That could change, Gitman observes.

Congress ``may reinstate capital-gains treatment,'' he says.

``So people will find that capital gains or growth funds are more attractive again. But you can't speculate about tax law changes.''