After rewriting the rules for saving money, money market mutual funds seemed to disappear for a few years. When their yields fell and banks were finally allowed to pay market-based interest rates, it was hard to tell whether money funds were better than the banks' money market deposit accounts, except that the banks could offer federal deposit insurance. Today, the money market funds seem poised for a comeback. Last April and May, when the bond market started looking for the fastest way to the basement, investors shoveled billions of dollars into the refuge of money funds. They knew that even though the yields were several percentage points less than the bond funds, at least they didn't have to worry about losing their principal.
Now, with the stock market reaching uncomfortably high levels for many people, some of them are thinking about places of refuge when the next serious bear market arrives. If they're investing through mutual funds, the refuge will probably be money market funds.
In the early 1980s, yields of about 15 to 16 percent range propelled money fund assets to more than $205 billion. As interest rates and fund yields declined, however, the funds' assets fell to about $165 billion.
But the flexibility of money funds and last spring's panic on the bond market helped lead to a renewal of interest, and the assets of taxable funds now stand at about $227 billion, with tax-free funds kicking in another $64 billion.
``People are trying to make a decision about what to do next with their money,'' says David Drucker, a financial planner in Bethesda, Md. ``Money funds give them a place to put their money while they decide.''
``The money funds are still the best deal in a down market,'' says Glen King Parker, publisher of Income and Safety, a newsletter (3471 N. Federal Highway, Fort Lauderdale, FL 33306) that rates the safety and gives current yields of bond and money market funds. ``Their yields are often better than the money market accounts at banks and thrifts.''
Even when the stated current yield on a money market fund is a bit lower than the interest rate offered on a bank's money market deposit account, money funds often return a higher yield over the course of a year. Because the funds' portfolios of Treasury bills, bank certificates of deposit, and short-term corporate debt instruments are constantly changing, fund managers can offer the highest possible yield each day. Many banks, on the other hand, change their yields weekly or monthly, so through compounding you are apt to end up with a bigger gain through a fund.
``The promise of the banks to be more competitive was never delivered,'' declares William E. Donoghue, president of the Donoghue Organization in Holliston, Mass. While yields on the banks' money market accounts may look close to the funds, Mr. Donoghue says, ``there are fees and charges at the banks you'll never see at a money fund.''
The current seven-day average money fund yield is about 6 percent, according to the Donoghue Organization. But if you shop around you can find funds with higher yields. Earlier this month, for instance, the Vanguard Money Market Prime (800-622-7447; in Pennsylvania,  648-6000) was paying a 6.56 percent yield. The Kemper Money Market Fund (800-621-1048) was paying 6.43 percent, the Cash Management Trust (800-421-0180) was paying 6.40 percent, and the Merrill Lynch Ready Assets (800-221-7210) was paying 6.39 percent.
These four funds are all part of large mutual fund ``families,'' so investors can move from money funds to stock or bond funds, and back, with a telephone call. And even though some money funds are sponsored by companies where most of their other funds are sold with a ``load,'' or sales charge, virtually all money funds are sold on a no-load basis.
A list of taxable and tax-free money funds and their yields, portfolio composition, maturities, addresses, and telephone numbers is contained in Donoghue's Money Fund Report, Box 540, Holliston, MA 01746. The weekly report sells for $595 a year, but you can get a single copy for $5.
Just because a fund has one of the highest yields does not necessarily make it the best fund for your money, however. Some fund managers have been known to buy money market instruments with longer-than-average maturities in an effort to increase yields. This may work for a while, but if interest rates rise, these funds will be locked into earlier - and probably lower - yields. According to Donoghue, the average maturity for all money fund portfolios these days is 47 days.
If you're concerned about safety and you still want to be in a money fund, the safest variety invests strictly in United States Treasury securities. These usually have the word ``government'' in the name, but that doesn't necessarily mean the portfolio is 100 percent Treasuries. You'll have to read the prospectus to find out for sure. Generally, all-government funds pay a slightly lower yield than ordinary money funds that buy commercial paper and bank CDs. The difference, however, should be no more than a few tenths of a percentage point.
The yield can also be reduced slightly if the fund takes a higher charge for expenses. All funds take a small portion of assets, usually about half a percent, for management fees and expenses, but some fees go as high as 0.8 percent. All other things being equal, you should find a fund with the lowest fees if you want a higher yield.
If you have a question that would make a good subject for this column, send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.