Despite the massive mounts of cash that flowed into investors' hands in June and July, net sales of long-term tax-exempt mutual funds declined by 87.6% in July, according to the Investment Company Institute.

Net-sales total sales minus redemptions declined to $550.3 million in July from $4.4 billion in the same month of last year. Net sales dam include reinvested dividends.

For the year to date, net sales declined by 72.5% to slightly more than $8 billion.

Current and advance refundings and bond maturations provided municipal bond investors with approximately $19 billion in cash in June and slightly more than $22 billion in July, according to MuniView. Information on coupon payments was not available.

But little of that windfall has been channeled into municipal bond funds, portfolio managers said.

"I think individuals have lost money this year, and this is the first time their investments have not paid off," said Patricia M. Dolan, a managing director and portfolio manager with Prudential Investment Advisors in Newark, N.J.

As a result, investors are looking for alternatives to tax-exempt mutual funds. While bond fund sales have faltered, direct purchases of municipals have increased, Dolan said. In addition, cash flows into equity funds and taxable money market funds have risen, she said.

Overall, total sales of stock and bond mutual funds declined by $11.9 billion in July to $31.5 billion, compared with $43.4 billion last year, institute figures show.

At $18 billion, July stock mutual fund sales were off by $200 million, compared with 1993 levels. But the equity funds still gamered more cash than bond and income funds. Sales of all bond and income funds declined by almost 50%; or $11.6 billion to $13.6 billion, compared with $25.2 billion in July 1993.

The total sales figure represents new money flowing into funds due to share purchases The figure also includes reinvested dividends.

Municipal fund redemptions rose 18.7% in July to $2.6 billion. Year to date, redemptions shot up 56.8% to $23.4 billion.

Rising interest rates, which have prompted several tighting moves by the Federal Reserve, have made some investors skittish this year, fund managers lamented.

"Individuals are a good leading indicator," Dolan said, explaining that Prudential expects rates will continue to rise as fund sales flounder.

"July was not the big decline in rates that we expected," she said, "which illustrated that investors weren't pouring cash into municipals, where an inflow, with the market's limited supply, would have pulled rates lower.

"There' s never been a Fed tightening that's lasted less than two years, and this one started in February," Dolan said, summing up her bearish market outlook.

Results for August don't look promising.

Preliminary figures from AMG Data Services in Arcata, Calif., show that long-term and short-term municipal funds had net outflows of $183 million in August. The figures reflect formation from about 75% of the more than 1,500 fund s that the firm tracks weekly, said Robert Adler, AMG's president.

The AMG figures include reinvested dividends.

"There was a definite slowdown in new money comming into the municipal bond sector in August. New buyer interest dried up," Adler said.

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