Flight to safety. That's been the strategy of most mutual fund investors during the first half of this year.

Can you blame them?

Enron

,

WorldCom

, America's war on terrorism and its weakening dollar: the bad news only seems to get worse. Midyear data on mutual fund performance and fund flows show that America's current political and economic uncertainty has investors running for safe harbors such as gold, international and real estate funds. But how much longer will these sectors remain safe?

"Short-term movements in the market will be unpredictable," says Scott Cooley, senior analyst at Morningstar. "The best an investor can do is keep the tenets of diversification in mind."

Indeed, investors who have spread their money across various sectors during the past couple of quarters are likely weathering the storm fairly well. While some sectors did poorly, others did significantly well. Let's take a look at the numbers.

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First the bad news: telecommunication funds fell 41% so far this year, science and technology funds 34% and utility funds 16%, according to Lipper. Now for some good news: gold-oriented funds rose 54% and real estate funds were up12%. International funds dropped only 4% and international small-cap funds rose 3%.

And, during May and April, the flow of money into the funds took a similar pattern. Telecommunication and utilities funds saw a net outflow of $150 million and $700 million, respectively, while gold and real estate funds had a net inflow of $570 million and $898 million, respectively, according to Lipper.

With the Euro almost on par with the dollar and the multitude of accounting scandals involving U.S. corporations, the mutual fund industry has seen a repatriation of European investment. "So many foreign countries depend on what is going on in the U.S.," says Kathryn Barland, senior analyst at Lipper. "Many believe that European cyclical stocks will do well when the U.S. recovers."

Russ Kinnel, senior analyst at Morningstar recommends the

(NEWFX) - Get Report

American Funds New World. "It's a tamer version of emerging market funds," he says. "Because it holds both stock and debt, the fund is a little less volatile."

Low U.S. mortgage rates have kept the real estate market alive. Indeed, the Commerce Department reported on Wednesday that new home sales increased 8.1% in May to a seasonally adjusted annual rate of 1,028,000 -- a monthly record. Low rates also have helped to buoy the financial services sector amid the storm of investigations by government authorities in the wake of company accounting scandals.

Banks are making money on the low interest rates because so many people are refinancing their homes. According to

Bankrate.com

, the current rate for a 30-year fixed mortgage is 6.12%, while the rate for a 15-year fixed mortgage is even lower: 5.57%. Returns on the sector have fallen only 1% so far this year, according to Lipper. In May, the sector saw a net inflow of $8 million, while in April it had a net outflow of $77 million.

Investors also sought safety in bonds. While stock funds took in about $10 billion in May, down from nearly $15 billion during the previous month, bond funds saw a moderate increase in net flows to $9.8 billion, up from $7.6 billion in April, according to Lipper. And all net money went into funds focusing on short and intermediate maturities.

Indeed, intermediate U.S. Treasury funds performed well, with a 6% return so far this year, according to Lipper. International income funds also did well, with an 8% return.

"Be wary of long-term rates," says Morningstar's Kinnel. "With short-term interest rates so low, long-term rates are vulnerable to an uptick. Also, because of the accounting scandals, there have been some nasty losses in corporate debt."

But given the rise in the overall inflow of funds, investors haven't let the dismal market freeze too much of their money. Overall estimated inflow to the mutual fund industry was $27 billion in May, better than the previous month's seasonal outflow.

"This market has been as frustrating to investors as a tire's slow leak -- they keep adding money but don't see any sustained gains," Lipper Senior Research Analyst Don Cassidy said in a statement accompanying May's data. "Still, to say that all investors are discouraged or scared is oversimplification, since some pockets of activity are evident."

In keeping with TSC's editorial policy, Lisa Meyer doesn't own or short individual stocks, nor does she invest in hedge funds or other private investment partnerships. Lisa welcomes your questions and comments, and invites you to send them to

Lisa Meyer.