Whether fund investors are reaching for a security blanket or just chasing performance, some are starting to turn from tech fare to

bond funds.

The latest mutual fund cash flow figures show a shift in taste. After more than a year of record flows to the most aggressive sector funds, sales of bond funds spiked in July. The month's top-selling fund: $33 billion

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Pimco Total Return, the heavyweight champion of the bond fund pack, run by guru Bill Gross.

Pimco Total Return's surprising ascension may be an anomaly, since investors have still yanked more money out of bond funds than they've invested this year. Nonetheless, when digested with other morsels -- such as the signs of more cash flowing into municipal bond funds and less going toward tech funds -- one can detect signs of a change in investor sentiment. Whether it's the start of a long-term trend or just a blip driven by a minority of skittish investors remains to be seen.

"It seems people are shifting money away from aggressive funds, given these July data and early August figures," says Scott Cooley, a senior analyst at

Morningstar

. "When there's a lot of volatility in the market, people seek out less risky investments."

Bonds are essentially loans to companies or government agencies that pay interest at a fixed rate until maturity, when the investor gets the principal back. Historically they have provided a more modest return than stocks, but their regular income payments have typically led to lower

volatility. Most portfolio models include bonds to undercut the risks of relying on stocks.

While both the

S&P 500 and the

Nasdaq Composite Index are marginally in the black for the year, they've had a bumpy ride and are still off their highs. Investors have been particularly vulnerable to the tech-heavy Nasdaq's volatility because the average growth fund has more than 40% of its assets sunk into the sector, according to Morningstar.

In the second quarter the Nasdaq tumbled nearly 15%. Tech funds and telecommunications funds, two of 1999's hottest performers and biggest sellers, fell 11.1% and 13.9%, respectively. Even diversified large-cap growth funds, another investor favorite, fell 5%.

"I think we're seeing a return to asset allocation. People are realizing they can't just focus their whole portfolio on tech stocks," says Ron Roge, a financial planner in Bohemia, N.Y.

A look at July's top-five sellers uncovers what might the start of an intriguing trend. Three large-cap growth funds show solid returns, like No. 2 seller, the $37.2 billion

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Growth Fund of America. (See this

story for a look at how the mammoth fund has managed to beat its competitors.) But Pimco Total Return, which was the No. 3 seller in June, tops the list with an $811 million inflow.

But it would be a mistake to conclude that Main Street investors are piling into Bill Gross' highly regarded fund, which took in 75 cents of every dollar invested in taxable bond funds last year, according to

Pimco

spokesman Jed Koenigsberg. Only $3.7 billion of the $33 billion fund's assets are from retail investors, so much of the recent inflows might be from institutional investors.

"Since most of the money in the Pimco fund is institutional, that flow figure can be a bit goofy," says Cooley.

It's also important to keep in mind that the number of stock funds and the assets they hold dwarf bond funds.

Indeed, U.S. stock funds are still the overwhelming choice of fund investors this year. Bond funds have been in outflow mode since Jan. 1.


That said, there are indications that bond funds, a forgotten investment in recent years, are back on many high net worth investors' radar screens. July investments in long- and intermediate-term municipal bond funds spiked up 159% and 233% from the month before. Municipal bond funds are often the choice of high tax-bracket types because they provide modest income that's exempt from federal, and sometimes local, taxes.

The shift catapulted the wallflower funds into the top-10 selling categories for the month as flows to higher-octane growth, tech and healthcare funds sagged. In fact, for the first time in recent memory, tech funds fell from the top.

Though it might be comforting to think that investors are embracing asset allocation models and prudently diversifying their assets, some might just be chasing funds with the highest recent returns.

"Some people are finally seeing that they need some bonds in their portfolio, but others are probably just moving money to where they see some decent returns," says Roge, who recommends a 25% to 30% bond stake for investors with moderate risk tolerance.

There's some support for his argument. In the second quarter, the average domestic bond fund was in the black, while the average diversified U.S. stock fund was down more than 3%. And the only unifying factor among the eclectic bunch of funds at the top of July's best-seller list is that each fund is ahead of the S&P 500 this year.

Whatever investors' motivation, observers see it as a short-term event triggered by the moves of a minority.

"I think of this as a blip because it's similar to what we've seen in volatile times over the last few years," says Morningstar's Cooley. "It's also always good to remember that the average fund investor is investing in the same funds they always do, not shifting around like this.