MONEY FUND ASSETS MAY SOON TOP $1 TRILLION.

Byline: Edward Wyatt The New York Times

Coming off one of its best years ever, the mutual fund industry is approaching yet another milestone, this one in a nook of the business that has attracted far less attention than stock funds and their persistent waves of cash.

Total assets in money market funds, now at $933 billion, are expected to top $1 trillion within a few weeks. The $1 trillion mark itself has little significance beyond its ability to satisfy humans' fascination with a figure that ends in a string of zeros.

But the money market fund, often thought of as the runt of the mutual fund litter, is probably more responsible for the industry's success than either its stock or bond siblings.

``Money market funds were the launching pad for the whole mutual fund business,'' said Bruce R. Bent, president of the Reserve Fund, introduced in October 1971 and the first money market mutual fund. ``They sensitized investors to the fact that they could do something with their money other than put it in a bank account.''

Indeed, the growth of money market funds has been spectacular. While mutual funds that invest in stocks took at least 55 years - from the Investment Company Act of 1940 until 1995 - to reach $1 trillion in assets, money market funds will do it in less than half that time.

Stock fund assets, which totaled $1.75 trillion at the end of 1996, still are much bigger than those in money market funds. But late last year, for the first time since 1991, the amount of assets in money funds surpassed the amount in bond funds. Just over $1 of every $4 in mutual funds was in a money market fund at the end of the year.

Also last year, and again for the first time, American households had more of their financial assets in money market funds than in checking accounts. While savings accounts and bank time deposits still exceed household investments in money market funds by five to one, savings assets have been relatively flat for five years. Money funds, meanwhile, have grown.

They probably will continue to do so, and for several reasons, industry analysts say. Short-term interest rates have remained stubbornly high, ``well above the psychologically important level of 5 percent,'' said Peter Crane, managing editor of IBC Money Fund Report, a newsletter.

The level is significant, Crane said, because ``it makes investors feel like they're earning something substantial, and it leaves too small of a spread between the yields on bonds and money market funds to attract many people to bonds.''

``Investors don't like money funds when they yield 4.7 percent,'' he added, ``but they love them when it's 5.''

Many investors have not forgotten the pain inflicted on their bond fund investments in 1994, when the Federal Reserve Board began a series of interest rate increases that sent the value of bond funds tumbling down. And with Alan Greenspan, the Federal Reserve chairman, apparently intent on nipping in the bud any resurgence of inflation, it appears unlikely that short-term rates and, therefore, money fund yields will fall sharply anytime soon.

Money market mutual funds differ from money market accounts at banks, of course, in that money funds are not federally insured. That has not hindered their growth, thanks to a couple of key marketing innovations within the mutual fund industry.

One was to obtain a ruling from the Securities and Exchange Commission that allowed money market funds to maintain a stable net asset value of $1 a share. While each money fund emphasizes in its documents that the $1 share value is not guaranteed, fund companies have vigilantly guarded that provision.

In 1994, when rising rates took a bite out of some investments in complex financial instruments known as derivatives, several fund companies bought back these tumbling investments from their money market funds to keep their shares from falling below $1 each.

Another innovation, instituted in 1974 by Edward C. Johnson III, the chairman of Fidelity Investments, was to allow check writing on money market funds. Today, money funds offer a host of other conveniences, too, like the use of a debit card or credit card to deduct payments automatically from a fund account.

Customers were slow to respond in the early days of money market funds, uncertain of the promises of easy access to their money. ``In 1973, we had one investor who kept moving $10,000 in and out of the fund every few days for three or four months,'' recalled Bent, of the Reserve Fund. ``He was driving me crazy, and I was close to telling him to take his business elsewhere. But then, suddenly, he put a couple of million dollars into the fund. He said he didn't believe that the system could work the way we said it would, so he was just testing it.''

When money market funds were introduced, banks were restricted from paying more than 5.25 percent a year on federally guaranteed savings accounts. That restriction was removed in late 1982, and banks immediately began to offer insured money market accounts that paid as much as 11 percent. So great was the demand for the insured accounts that the assets in money market funds shrank by more than a third.

Banks then reduced their rates. Not since April 1983 have banks offered a higher rate on insured accounts than that available on money funds, Bent said.

Money market funds have also been used by investors as a holding pen for money going into stock and bond funds, or as a haven in market upheavals.

Investors have aggressively pursued the highest possible returns in money market funds. But because the funds can invest in only certain types of securities under federal regulations, about the only way a fund company can raise a yield is by achieving economies of scale and by lowering operating expenses.

Fund companies often waive a portion of the fees or expenses on a fund, especially a new one, to attract a critical mass of money.

The role of expense waivers is nowhere more apparent than at the Strong Funds of Milwaukee. For most of the latter half of 1994, assets in the Strong Money Market fund crept upward, reaching $481 million at the end of November, from $433 million at the beginning of May.

Then, in December, Strong agreed to waive all fees and expenses on the fund, sharply raising its yield. Assets nearly doubled in two months, topping $2.4 billion in less than a year.

In August 1995, Strong slowly began adding back the operating expenses to its money market fund and assets immediately began to dip. But many of the departing assets went directly to another Strong money fund, the Heritage Money Market fund, which was introduced in June 1995 and which charged no fees or expenses in its first six months.

Assets in the Heritage fund continued to grow even after it charged investors for fund expenses and even though its minimum investment remained high, at $25,000.

The main reason is that Heritage's charges were kept low, in part because the fund was big and transactions were minimal. In addition, the Heritage fund charges a fee for most transactions, including checks.

The low expenses gave the Heritage fund the highest yield, at 5.7 percent, of all money market funds for the 12 months ending Dec. 31, according to the IBC Money Fund Report.