Money market mutual fund coffers are swelling as interest rates rise, and banks - which manage a healthy 30% of money fund assets - are sharing in the bounty.

In just the past two weeks, almost $19 billion has flowed into money market funds, boosting their total holdings to a record $651 billion, according to the Investment Company Institute, a Washington-based trade group.

One reason for the boom is that money market funds provide a refuge for customers who have been fleeing the turbulent stock and bond markets over the past year. What's more, yields on money funds now stand above 5%, nearly double the level of a year ago.

The surge in money market assets has been clearly in evidence at banks for months.

According to bank call report data, gross sales of money market funds by commercial banks totaled $131 billion in the three months ended Sept. 30, the latest period for which data are available. That's a gain of more than 40% from the previous quarter.

Of course, gross sales figures are only a rough gauge of banks' money fund activity, because they don't reflect withdrawals and redemptions. Bankers, however, attest that business has been exceptionally strong.

"We've had a tremendous inflow into money market funds," said Peter Herlihy, vice president of Fleet Investment Services, Providence, R.I. The brokerage arm of Fleet Financial Group sold $170 million of the funds in December alone - nearly double the level of January 1994.

Money market funds are typically considered attractive for their liquidity and safety. Investors can withdraw their money from these investments without penalty.

Unlike stock and bond mutual funds, which fluctuate according to underlying investments, money funds keep their share price at $1. As a result, the yield - but not the principal - fluctuates.

But the run-up in money market fund assets is not undiluted good news for banks. Managing these funds is a low-profit business for everyone involved.

Management fees typically run a razor-thin 0.25% to 0.45% of assets - about half the level of bond funds, and about one-third the level of stock funds.

As a result, bankers say, only the biggest players can truly prosper in money fund management.

"The idea is to gather as many of these funds as possible," said Roger Hale, money market fund chief at Banc One Corp., Columbus, Ohio. From a profit standpoint, he added, "We would rather have the higher margin (stock and bond) funds."

In many cases, the asset gains on the money market fund side are coming at the expense of long-term funds.

At PNC Bank Corp., for instance, customers plowed $1.3 billion into money market funds last year, according to George Bernard Jr., senior vice president of the Pittsburgh company's brokerage arm.

Much of that came from taxable and tax-free bond funds, including some managed by PNC, Mr. Bernard said. By and large, customers were acting on "negative sentiment in the market," he said.

Though the shift of assets from high-margin stock and bond funds to low- margin money market funds can be a blow to banks' mutual fund businesses, banks must not overlook the upside, said Donald E. McNees, a banking consultant with Towers Perrin in New York.

In a down market, "the object is not to be the most profitable, but to hold on to the customer," Mr. McNees said. Money market funds can help banks cement relationships with customers, he said.

Eventually, he added, money market funds can "provide a reservoir to fuel the more profitable products, in more active times."

Fleet Financial Group certainly thinks so. "We view money market funds as a great way to bring in new households to the bank," said Mr. Herlihy.

Fleet has found an unusual feature of its Galaxy money market funds to be an especially powerful magnet. Since 1991, the funds have offered unlimited check-writing privileges. Money fund customers are typically limited to writing a handful of checks per month.

At the same time, bankers and financial planners recognize that money market funds are not for everyone - particularly investors with an eye on the long term.

Harold Evensky, a Florida-based financial planner, said he discourages his clients from using money funds as an investment. Instead, they should serve as "reservoirs for very temporary funds."

By forgoing long-term investments such as stocks, investors are likely to lose purchasing power over time, Mr. Evensky said.

PNC's Mr. Bernard warned that while current government money market fund yields of over 5% may sound attractive, customers miss out by not investing in longer-term securities, such as Treasuries.

Nicholas S. Perna, chief economist at Shawmut National Corp., Hartford, Conn., said that if interest rates begin to flatten - as he expects they will this year - money market funds could soon lose their glow.

"The rate of growth could be more subdued for money market funds and the gap between money market funds and bank deposits could narrow," Mr. Perna said.

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