Big-Money Mutual Funds Avoid Newfangled Notions.

ASK what's big in U.S. mutual funds nowadays, and the answer might surprise you.

It's not index funds, or internet-connected computer and telecommunications funds. Almost two decades into a roaring bull market, the biggest funds -- that is, those that have the most money to manage -- are still a remarkably old-fashioned, conservative bunch.

Among the 25 largest long-term (stock or bond) funds ranked by the research firm Lipper Inc. as of Sept. 30, 12 include income or dividends in their stated investment mission. Only two are index funds, and none specialize in the Internet.

This Top 25, with aggregate assets of more than $850 billion, account for about 20 percent of all the money in more than 5,000 stock and bond funds.

Income? Dividends? Who cares about such stodgy things in an era when stocks, as measured by the broad Wilshire 5000 Index, have risen at an average rate of 22 percent a year for the past five years?

Dividend yields on stocks used in the major market indicators are a puny 1.25 percent to 1.5 percent, even less than the interest on the average bank savings account. And bonds -- that staple of income investors' diet -- are muddling through their worst year for total return (price changes and yield combined) since 1994.

"Bonds have not had a good year," said Gary Madich, who oversees $15 billion in fixed-income accounts at Banc One Investment Advisors Corp. in Columbus, Ohio. "There's just not a lot of people buying bond funds."

That raises an important distinction. When you measure by the amount of new money coming in, the funds enjoying the most success are an entirely different group. The old guard is on the defensive.

New investments this year have poured into low-cost index funds, which seek simply to duplicate the performance of a market measure such as the Standard & Poor's 500 Index. They netted $45 billion from investors over the first nine months of 1999, according to Financial Research Corp. in Boston -- or 42 percent of the total net inflows of $107 billion into stock funds.

Bond funds attracted a paltry $15 billion, FRC reported.

Conservatively managed, income-minded funds presumably represent solid, long-term capital. If we were talking about fickle "hot" money ready to jump into something else at the first sign of trouble, it wouldn't be in income-minded funds in the first place. It wouldn't have the patience for it.

After the Big Two in the fund industry -- the $94 billion Fidelity Magellan Fund and the $91 billion Vanguard 500 Index Fund -- the next three largest funds are Washington Mutual Investors, at $56 billion; Investment Co. of America, at $52 billion; and the Fidelity Growth & Income Fund, at $48 billion.

Washington Mutual, an income fund, and Investment Co. of America, with a growth-and-income strategy, are part of the American Funds group run by the publicity-shy Capital Group Co. in Los Angeles.

Other Top 25 funds with income or growth-and-income mandates, in descending order of assets: Vanguard Windsor II, Vanguard Wellington, Fidelity Puritan, Fidelity Equity Income, Capital Group's Income Fund of America, Pimco Total Return, Putnam Growth & Income, Fidelity Equity Income II and Morgan Stanley Dean Witter Dividend Growth.

Pimco Total Return is the only pure bond fund on that list. Others mix stocks with bonds or concentrate on stocks, looking for "reasonable income with the potential for capital appreciation," as Fidelity says of its two equity income funds.

Most of these funds haven't had a great year in 1999, as interest-rate concerns have weighed on higher-yielding stocks like banks and utilities, just as they have depressed bond prices. Thus far this year, Washington Mutual and Vanguard Wellington Income are up more than 4 percent. Fidelity Growth & Income is up about 5.8 percent and Pimco Total Return was up less than 1 percent.

In a year when dozens of U.S. high-tech and Asian stock funds have gained 50 percent or more, it's easy to understand why income-minded funds haven't been big sellers. Over time, though, it's important for these funds to thrive.

They're well suited for the fund industry's purposes -- to keep clients once it attracts them. They're also well suited for long-term investors, since their conservative, diversified approach doesn't depend on nonstop bull-market conditions, but is designed to keep going in all kinds of financial weather.

Risky business

Whenever a mutual fund investment plan goes wrong, miscalculated risk is probably the devil in the deal.

Like the red gent with the pitchfork, financial risk can get you in many different ways -- some obvious, others sneaky.

A basic purpose of investing is "risk management," in business parlance, using your money to cope with the risks that inevitably arise in your life, while avoiding those you don't want or need to take.

Many investors mismanage risk by taking too much of it. That may happen if you choose a fund looking only at the dazzling results it has been getting without taking into account the risks its manager takes.

If a stock fund is outperforming all the others, or a bond fund yields more than its competition, ask how the manager is achieving this feat.

At the other end of the scale from greed, fear of market risk can be just as devilish if it makes you shy away from all uncertainty. In other words, you can run from investment risk, but you can't hide.

Sure, a three-month Treasury bill carries virtually no risk of default, and offers a known dollar return that's shielded from the ups and downs of the longer-term bond market. But it exposes you to another kind of risk -- that your money won't earn a good enough return, after inflation takes its cut, to get you to your long-term goals.

How to sort all this out? To begin with, try not to choose investments based solely on what happens in the markets and all the fragmentary images of risk you see there. This way, you can avoid getting distracted by issues that matter mostly to professional managers of other people's money -- like for instance whether the performance of your investments beats an index such as the Standard & Poor's 500.

The key to picking your risks is getting a clear picture of what you want to accomplish. If your purpose can be achieved with something conservative like top-rated bonds, you invest that way, avoiding risks you don't need to take. If your purpose requires long-term growth investments, you try to overcome the urge to play it safe in the money markets. In all cases, you diversify to protect against the unexpected.

Facing up to risk starts with self-examination, Many times, people find that just saving more solves all kinds of ills.

Chet Currier is a columnist with Bloomberg News.