NEW YORK -- Despite signs that the economy is strengthening, one of Wall Street's perennial safe havens -- bond funds -- is pulling in big sums from still skittish investors. But experts caution that those investors could be breaking the cardinal rule about buying low and selling high.
By the end of July, investors had poured $86.6 billion into bond mutual funds so far this year, according to the latest data from the Investment Company Institute, an industry group in Washington. That puts bond funds in position to break last year's record inflow of $87.7 billion.
Stock funds, meanwhile, have seen the reverse: Investors in June and July pulled $70.9 billion from equity funds, nearly canceling out the $71.4 billion in inflows seen during the first five months of 2002.
"They may be selling stocks low and buying bonds high," said Eric Tyson, author of Mutual Funds for Dummies. "Selling stock funds to buy bond funds at this time, when the stock market is so depressed, is like closing the barn door after the horses."
Bond funds are appealing in bear markets because they are considered safer bets. Investors are essentially holding IOUs from a government, municipality or corporation. Investors purchase bonds or bond funds with the idea that they will recoup their investment along with some interest by the specified maturity date.
Recent performance in the market has bolstered bond funds' reputations as safe havens. Taxable bond funds posted a return of 0.72 percent the last week in August, according to Lipper Inc., a New York-based fund researcher. Equity funds had a negative return of 4 percent after four straight weeks of gains.
And, while the interest rates on bonds are low -- 4.17 percent on a 10-year U.S. Treasury bond, for instance -- they beat stocks with their falling prices and bank savings accounts with their skimpy interest rates around 1 percent or so.
"People see it as a safe haven. Right now, I don't believe people are going to treasuries or bonds to make money. It's that or losing money in equities," said Martin Vostry, research analyst at Lipper.
But investment experts say it's probably too late to make real gains by choosing bond funds over their stock counterparts. Vostry called bond funds "highly valued."
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