(MONEY Magazine) – THE MUTUAL FUND INDUSTRY SURE MUST BE EATING its Wheaties. Assets in stock and bond funds grew from a comparatively scrawny $137 billion spread among 820 funds a decade ago to a strapping $1.55 trillion currently invested in more than 3,900 portfolios (not counting money-market mutual funds). And while the industry has bulked up like Stallone, today's 15 biggest stock funds and 10 brawniest national bond funds look like awesome Arnold: The 25 heavyweights now command $252 billion. That's an astounding 16% of total industry assets, and more money than was invested in the entire universe of stock and bond funds as recently as 1985. Only 10 years ago, four of these colossal 25 weren't even born; the other 21 had combined assets of only about $18 billion. But does bigger mean better? Logically, the fattest funds would get that way because their winning records boosted assets and drew flocks of fresh cash. But it ain't necessarily so: Sometimes, for example, a fund's reputation can pull in shareholder dollars long after its glory days have ended. Moreover, growth can make it harder for some funds to maintain their winning streaks. For instance, when managers start deploying billions instead of millions, they must often increase the number of stocks in their portfolios and buy larger issues as well. Such changes in strategy can sometimes lead to disappointing results. To help the millions of shareholders who own a piece of these 25 fund industry Gibraltars, or anyone interested in joining their ranks, MONEY set out to analyze each fund's recent record and future prospects. We pored over portfolios, dissected performance rankings and consulted more than two dozen fund experts to rate each fund a buy, sell or hold. The results of our investigation should cheer most big-fund fans. Thirteen, including Magellan, Janus and PIMCo Total Return, earned buy recommendations because we believe they are poised to outperform comparable funds over the next 12 to 18 months. In our book, a buy means new investors and current shareholders alike have ample reason to put fresh money in the fund. We put hold ratings on nine funds, including Twentieth Century Ultra, Vanguard Wellington and Franklin U.S. Government Securities. Our reasoning varied: Either the holds seemed capable of merely average returns over the next 18 months, or we were troubled by recent subpar performance, or there were similar funds with superior prospects readily available. Because these funds have shone in the past, however, we think current investors would do well to sit tight in them -- unless they have compelling personal reasons to sell. As veteran investors know, success comes from sticking with a few strong funds that produce superior gains over periods of five years or more, not from opening and closing accounts in a usually futile chase for the hot name of the week. Finally, three funds -- Dean Witter U.S. Government Securities, IDS High- Yield Tax Exempt and Dreyfus Municipal Bond -- got tagged sell. Key reasons: They posted below-average results without showing much prospect for improvement soon, or they are simply too risky in our view. You can find detailed performance records as well as cost and portfolio data for all 25 funds in the table below. The risk figures cited in the story are from Morningstar, the Chicago mutual fund rating service, and rely on its proprietary measures. Ultimately you will need to take your own portfolio into account in following our advice: If selling means taking a tax hit, you may want to hang on until you need the money or have capital losses to offset your gains. Or you may want to diversify your holdings before upping your stake in funds we rate a buy. Here are our capsule evaluations, stocks followed by bonds, starting with the biggest of all: Fidelity Magellan.

STOCK FUNDS FIDELITY MAGELLAN Assets: $36.7 billion. MONEY rating: Buy

Jeff Vinik, 35, who has managed the world's largest mutual fund since 1992, follows in the stock-picking tradition of his predecessor, Peter Lynch. Specifically, Vinik uses what pros call a bottoms-up approach, checking out ^ companies one by one, preferably in person, before adding them to the portfolio. But there have been a couple of notable changes since Lynch's 1990 departure. For one thing, assets have tripled. But the number of stocks in the portfolio has shrunk by more than half, from 1,300 under Lynch to 600 today. As a result, Vinik inevitably makes bigger bets on individual companies and sectors than did Lynch, though Lynch too swung for the fences from time to time. For example, fully 29% of Magellan's assets are now in technology stocks (up from 18% in January), including chipmakers Motorola (among the fund's biggest holdings at 2.7%) and Intel (2.3%). Vinik believes such stocks will benefit from the irreversible trend of "computers and technology replacing people." His second biggest stake is the lagging financial services sector, at 11.2%, which he believes will flourish as aging baby boomers step up their investment activity. Such concentrated positions give pause to some investment analysts. Newsletter editor Richard Young (Richard C. Young's Intelligence Report; $197 a year; 800-777-5005) believes Magellan's size forces Vinik to take larger risks as he tries to outperform the market. Thus, he says, Magellan is too dicey to be considered a "core holding" for conservative investors. But other experts, including Eric Kobren, editor of Fidelity Insight, an independent newsletter ($99 a year; 617-235-4432), believe Fidelity is a buy for investors seeking aggressive growth, and we agree. Vinik's flexibility and proven stock- picking skills -- the fund gained 24.7% in 1993, vs. 10.1% for the S&P 500 -- figures to help Magellan, one of five Fidelity equity funds on our list, maintain its position as an above-average growth fund.

INVESTMENT CO. OF AMERICA Assets: $20 billion. MONEY rating: Buy

The largest of four American Funds stock portfolios on our list, this growth and income entry exemplifies the American group's style of steady performance that wins marathons rather than sprints. Its 10-year average annual return of 15.3% puts it in the top 12% of all G&I funds for the period, yet it never cracked the top decile in any one of those years. That consistency is rooted in American's unusual management system, where every fund has multiple managers (ICA has nine), each of whom exercises control over a portion of the portfolio. ICA's team has 77% of shareholders' money in 150 large stocks such as AT&T and IBM. About 15% of the fund is in short- and intermediate-term government bonds that can cut the fund's share price volatility. Partly as a result, ICA registers between 30% to 40% less risk than the typical equity fund. While ICA charges a steep 5.75% sales commission, its 0.59% annual expense ratio is well below the average equity fund's 1.38%, so holders willing to stay in the fund for 10 years or so needn't fret about the initial load. Going forward, the fund's slow and steady style could thrive no matter what fashions sweep through the markets next year, making ICA a buy in our book.

WASHINGTON MUTUAL INVESTORS Assets: $13.3 billion. MONEY rating: Hold

Washington Mutual gets better the longer you own it. Despite its failure to finish in the top 50% of growth and income funds in three of the past 10 years -- and scoring in the top 20% just twice -- this portfolio of 100 large- capitalization stocks (example: $28 billion GTE) is nevertheless in the top 20% of its investment category for the past 10- and 15- year periods. "Even when it trails the leaders, it manages to remain competitive," says Laura Lallos, an analyst for Morningstar. "Over the long term," she states, "it is impressive." Indeed, we would rate this fund a buy, rather than hold, if it weren't for the fact that its American fund sibling Investment Co. of America (see the previous item) earns first place honors among the family's growth and income funds: ICA's long-term gains top Washington Mutual's, and Morningstar rates it as slightly less risky.

FIDELITY ASSET MANAGER Assets: $11.8 billion. MONEY rating: Hold

Until this year, Bob Beckwitt, who has steered Asset Manager since its 1988 launch (it's the newest fund among our big 25), seemed to be pulling off an astounding juggling act with this 1,200-issue portfolio. Beckwitt, 36, shifts assets among stocks, bonds and cash in response to changing market conditions. And when his calls are correct, his moves can reward shareholders handsomely. Example: Although the S&P 500 fell 3.4% in 1990, his shrewd shift to fixed- income investments brought home a 5.4% gain, fifth-best of the 47 asset- allocation funds trading at the time. But when stocks and bonds fell in tandem around the globe during the first half of this year, even Beckwitt's dodgy moves couldn't prevent Asset Manager from dipping 3.3% through Sept. 23, vs. 1.5% for similar funds. Bracing for what he believes will be a tough 1995, Beckwitt has dropped his < equity stake to 38% of assets from 51% a year ago and increased cash to 29% of assets from 16% in 1993. Beckwitt says he will wait for markets to improve before putting more cash to work. While he's waiting it out, so will we, rating this fund a hold.

VANGUARD WINDSOR Assets: $11.6 billion. MONEY rating: Buy

John Neff, 63, has one of the best records in the business: a gain of 4,766% since he started running Windsor in June 1964, vs. 2,411% for the average equity fund in that time. Neff is a classic value hunter, feasting on stocks trading at discounts of 30% to 50% to the market's price/earnings ratio. And when he likes a stock, he scoops up a heaping helping. Neff spreads Windsor's billions over a mere 67 stocks, with his top 10 holdings accounting for 41% of the portfolio. His biggest single position, at 6.1% of assets, is Citicorp, up 20% so far this year. Despite such large bets, Windsor has been 14% less risky than the average equity fund over the past 10 years. Although the value stocks Neff favors appear to be ceding market leadership to growth issues, we rate Windsor, one of four Vanguard funds among the 25 biggest, a solid buy. Neff's talents transcend market cycles. There is one major complication, though. Because the fund has been closed to new investors since 1985, you can acquire shares only if: 1) You are one of the fund's 400,000 current shareholders; or 2) You participate in one of the 400 or so company savings plans with accounts in the fund.

FIDELITY PURITAN Assets: $11.3 billion. MONEY rating: Buy

In the more than seven years that he has managed this 47-year-old equity total-return fund, Richard Fentin, 39, has let value be his lodestar: Any stock or bond he buys must be priced at less than half its worth as measured by book value, earnings, cash flow or assets. That yardstick has helped Puritan notch a total return of 120% vs. 86% for the typical balanced portfolio during Fentin's tenure. Right now, industrial firms such as W.R. Grace, Stone Container and Union Carbide make up the biggest share of the 330- stock, 300-bond portfolio, at 11%, with energy a close second at 9%. Like Windsor's John Neff (see the previous item), Fentin has shown that he can prosper under various market conditions. "Puritan is among the top- performing funds regardless of the time period you pick," says Sheldon Jacobs, editor of the No-Load Fund Investor ($99 a year; 800-252-2042). "This shows that the manager has a knack of being in the right part of the market at all times." Therefore, we rate Puritan a buy (as a bonus, Fidelity is waiving Puritan's 2% load until December 1995).

INCOME FUND OF AMERICA Assets: $10.8 billion. MONEY rating: Hold

This American Funds portfolio aims to combine the high current income of a bond fund with the long-term gains of a stock fund. It fulfills that goal fairly well. Its six managers generate a strong yield -- lately 5.8% -- by investing in dividend-paying stocks (currently 40% of assets) such as Bristol- Myers Squibb as well as intermediate-term corporate and government bonds (48% of assets). The fund has produced a very respectable 13% average annual return over the past 10 years -- vs. 11.5% for the typical income total-return fund. That's laudable, and so is IFA's low volatility -- 45% below that of the typical equity fund. Yet in our view, unless you need every penny of the fund's income, you can improve your chances of piling up profits over the long haul with other conservative equity funds, such as Fidelity Puritan, described above. Therefore, we rate 5.75%-load IFA a hold.

TWENTIETH CENTURY ULTRA Assets: $10 billion. MONEY rating: Hold

Call this aggressive growth fund's recent performance ultra-disappointing. Its 3.8% loss for the past 12 months to Sept. 1 landed it in the bottom 14% of aggressive growth funds. The chief culprit: a huge stake in technology stocks (currently 55% of the fund's assets, including such software companies as Oracle Systems), which have floundered for much of the year. True, tech stocks have begun to stage a comeback, rising 7% as a group in August. And like the Janus Fund (see the next item), this combustible Kansas City swinger makes its money when earnings-driven growth stocks lead the market, as they are expected to do next year. Even so, we can only rate Ultra a hold. Here's why: Ultra built its remarkable record (a 17.9% average annual gain for the past 10 years, better than 97% of all equity funds) by investing in a relative handful of mainly small-company stocks. But the fund has tripled in size in the past three years alone. All that cash has forced lead manager James Stowers III, 36, and his colleagues Derek Felske, 35, and Christopher Boyd, 35, to buy, buy, buy. The portfolio has swelled to 160 stocks from 80 at the beginning of 1992 and, says Stowers, figures to hit 250 by mid-1995. He insists that the expansion won't crimp Ultra's ability to score big gains. "Holding more names will dampen our upside, but we also expect it to dampen the downside too," he says. "So over time we expect to maintain returns in line with our historic rate." If that forecast proves true over the next year, Ultra would merit a buy.

JANUS FUND Assets: $9.4 billion. MONEY rating: Buy

Although Denver's Janus Fund is named after the mythological Roman god famed for his ability to look in two directions at once, shareholders must be wondering whether manager James Craig, pictured on page 72, has lost his focus. The fund's one- and three-year gains (4.7% and 9.8%, respectively) fall outside the top third of growth funds. But in this case, you shouldn't be shortsighted. For the past two years the market has favored cyclicals over the large growth companies that dominate the Janus portfolio. Now that many market analysts expect growth issues to re- emerge, Craig, 38, is anticipating a sweet repeat of his stunning 1989 rebound. "In '87 and '88, everyone flocked to cyclicals," says Craig. And predictably Janus lagged the S&P 500 slightly. "Then the economy slowed in '89 and attention shifted to growth stocks," he adds. The result: Janus gained 46% in '89, creaming the S&P by 15 percentage points. Craig's cash position is down from last spring's 31% to a bullish 6.5%. And he is expanding the portfolio to about 125 issues, including recent additions Coca-Cola, Lowes and Pfizer. Financial stocks, including Credit Suisse, are his largest sector holding, at a steep 30% of assets. Analysts such as Ken Gregory, editor of the monthly No-Load Fund Analyst ($195 a year; 510-254-9017), believe Craig will return to form next year; so do we. Janus is a buy.

FIDELITY GROWTH & INCOME Assets: $9.2 billion. MONEY rating: Hold

This 3%-load fund gained 319% from its Dec. 30, 1985 inception to Sept. 1, nearly double the advance of the average equity fund during that time. Steve Kaye, 35, who has supervised the 348-stock portfolio since January 1993, looks for shares that are trading well below what corporate earnings or cash flow might otherwise suggest. Lately, his nose for value has led him to build big positions in health care (12% of the portfolio), including Columbia Healthcare, the nation's largest health maintenance organization, plus real estate (4%). We rate Growth & Income a hold, largely because we favor a no- load alternative within the 209-fund Fidelity family. The similar Fidelity Equity-Income II has both a better three-year record (17.7% average annual gain to Sept. 1, vs. 13.2%) and is less risky than its larger sibling. And through Sept. 23 of this year, Equity-Income is up nearly 5.5%, vs. G&I's 2.5%.

VANGUARD WELLINGTON Assets: $8.8 billion. MONEY rating: Hold

You won't go wrong hanging on to your Wellington shares. The steady no-load, managed by Vincent Bajakian, 64, and Paul Kaplan, 47, generally keeps the portfolio anchored by a 60% to 70% stake in value stocks, most of them large- caps (example: drugmaker Pfizer, recently 2% of fund assets), and some 30% to 40% in intermediate-term government and high-grade corporate bonds. Wellington has returned an annual average of 13.6% over the past 10 years, vs. 12.6% for the typical balanced fund. But we grade it no higher than a hold today, mainly because we feel investors might fare better with the similar Fidelity Puritan, described above. Puritan has outperformed Wellington over the past one-, three-, five- and 10-year periods. Moreover, it has been 19% less risky over the past 10 years.

FIDELITY CONTRAFUND Assets: $8.5 billion. MONEY rating: Buy

Since Will Danoff, 34, took over Contrafund in 1990, assets have ballooned more than eightfold. Contrafund has averaged a 15.8% annual gain over the past three years to Sept. 1 -- better than 89% of growth-stock funds -- and this year's 0.9% loss through Sept. 23 is better than the average growth fund's 1.3% decline. Danoff likes strong runners that have stumbled but are making the right moves to get back on track. Two examples: IBM, the largest holding in the 650-stock portfolio (at 2.2% of assets), and Philip Morris (1.8%). While the fund's size forces Danoff to buy larger companies, he still has $2 billion of his assets in stocks with market capitalizations of $1 billion or less. We believe Danoff's 22% stake in tech stocks and 10% holding of health- care issues will help him produce superior results over the next 12 to 18 months, making Contrafund a buy.

VANGUARD INDEX 500 Assets: $8.5 billion. MONEY rating: Buy

By definition, investors who put their money in Vanguard Index 500 are happy to settle for average returns. And that's what they get. The fund promises to trace the S&P 500-stock index to within a few tenths of a percentage point; - for the past 10 years to Sept. 1, the fund has gained 14.6%, practically matching the S&P's 14.9% advance. For keeping its promises to investors and achieving its goals, Index 500 earns a buy.

VANGUARD WINDSOR II Assets: $8.1 billion. MONEY rating: Buy

Despite its copycat moniker, growth and income fund Windsor II is no mere clone of its famous stablemate. Yes, like Windsor's Neff, lead manager James Barrow, 54, is a value seeker. His approach has produced a return of more than 217% since the fund's inception on June 30, 1985, vs. 183% for the typical growth and income fund during that time (and 222% for Windsor). But unlike Neff, Barrow doesn't make big bets even on companies he likes. For example, the top 10 holdings in his 160-stock portfolio -- mostly banks including Chase Manhattan and such energy firms as Phillips Petroleum -- represent 25% of the fund's assets (vs. 41% for Windsor). Such relatively broad diversification has helped the fund remain about 21% less risky than the average equity fund over the past five years. That low risk plus Barrow's shrewd instincts make Windsor II a buy, even heading into what promises to be an uncertain year for value stocks.

EUROPACIFIC GROWTH Assets: $8 billion. MONEY rating: Buy

Stamping a buy rating on this American Funds Group foreign portfolio is tr s simple. After all, it has produced above-average returns and below-average risk almost from the moment it was founded in 1984. EuroPacific outpaced 85% of all stock funds over the past five and 10 years while incurring 25% less risk than the typical equity entry, as measured by Morningstar. Currently about 40% of fund assets in the 275-stock portfolio are invested in Europe, where many countries are in the early stages of economic recoveries; 25% in Japan and Pacific Rim countries; and 15% in Latin America, including a 1% stake in Telefonos de Mexico. We think the five-member management squad has positioned the fund to continue treating its shareholders to a luxury world tour.

BOND FUNDS

FRANKLIN U.S. GOVERNMENT SECURITIES Assets: $12 billion. MONEY rating: Hold

Unlike many bond funds that vigorously trade securities in search of capital gains, Franklin funds tend to follow a buy-and-hold approach. A case in point: the U.S. Government Securities portfolio (one of two Franklin entries among the big 10 bond funds). It applies that slow-and-steady technique to intermediate-term Ginnie Maes, shorthand for mortgage-backed bonds issued by the Government National Mortgage Association. The fund's 3.3% loss from January through Sept. 23 in the face of sharply falling bond prices is a fourth less than the average for its category. And its annualized 8.1% return over the past five years beats two-thirds of its peers; the fund lately yielded 6.8%, above its category average of 5.8%. As 10-year manager Jack Lemein, 50, proudly proclaims, "We're a plodding, high-quality fund." Lemein also can boast about avoiding risky derivatives, the complex financial instruments whose value is "derived" from the performance of some underlying asset or index. Many derivatives tied to the mortgage market melted down as rates heated up this year; funds holding such instruments generally had steep losses. Given the threat of additional interest-rate increases, many fixed-income specialists believe the fund's duration of 5.8 years is optimal right now. (Duration indicates a fund's sensitivity to a one-percentage-point rise in interest rates; for instance, a fund with a three-year duration would fall about 3% and one with a 5.8-year duration, 5.8%.) "It's smack where you should be on the yield curve," declares Marilyn Cohen of L&S Advisors, a Los Angeles investment firm. Nevertheless, we rate 4.25%-load Franklin Government a hold. We think investors not already in the fund will get more bond profits for their bucks with no-load Vanguard Fixed Income GNMA Portfolio, a superior performer described below.

DEAN WITTER U.S. GOVERNMENT SECURITIES Assets: $9.8 billion. MONEY rating: Sell

Dean Witter U.S. Government has compiled annualized returns of 8.1% over the past 10 years investing in high-quality intermediate-term U.S. Treasury and mortgage securities. That performance places this lumbering laggard in the bottom 14% of all government bond funds for the period. Rajesh K. Gupta, 34, who has managed the fund since 1992, is faring a little better this year. With rates rising and bond prices falling, his fund matched the average government bond fund, losing 4.4% through Sept. 23. Why the poor long-term showing? Look no further than the fund's stiff 1.2% annual expense ratio -- vs. 0.98% for the typical U.S. bond entry. (The fund also has a 5% maximum deferred sales charge.) While the fund offers a tidy 6.1% current yield (vs. a category average of 5.8%), there are no signs that total returns will improve, and better alternatives abound, including several discussed below. Therefore, we rate this fund a sell.

FRANKLIN FEDERAL TAX-FREE INCOME Assets: $6.9 billion. MONEY rating: Hold

Andrew Jennings is a typical Franklin bond fund manager. In his four years as the head of this 4.25%-load muni bond portfolio, Jennings, 54, has bought newly issued high-quality bonds at close to face value and held them to maturity. That staid strategy has helped the fund grind out an average annual return of 8.1% over the past five years to Sept. 1, better than 80% of its peers. But the fund's recent duration of 9.8 years -- 1.3 years longer than the typical national muni fund -- makes the fund 15% more vulnerable to rising interest rates than its average competitor. Despite that flaw, we rate the fund a hold on the strength of its solid record and high current yield (5.3% tax-free, which is the equivalent of a taxable 7.4% for a taxpayer in the 28% federal bracket).

IDS HIGH-YIELD TAX-EXEMPT Assets: $6.3 billion. MONEY rating: Sell

You would think that the weight of this fund's 5% load alone would cause it to sink hip-deep into the bog of high-yield (read: junk) tax-frees. Not so. Kurt Larson, 54, the fund's manager for 15 years, stashes just 17% of his portfolio in below-investment-grade issues, vs. 34% for the average high-yield muni fund. This relative caution makes the fund slightly less prone to price swings than the typical national muni bond fund -- but at a cost. IDS High Yield's 5.4% current payout trails the average high-yield muni fund's 5.7%. In addition, its five-year annualized total return of 7.3% to Sept. 1 lags the category average of 7.7%. As a result, we rate IDS High-Yield a sell. We think municipal junk fans would be better off with T. Rowe Price Tax-Free High Yield (800-638-5660), which is 24% less risky than the average muni bond fund, boasts a current yield of 6.1%, sports a five-year annualized return of 8.5% and, better yet, carries no sales load.

VANGUARD FIXED INCOME GNMA PORTFOLIO Assets: $6.2 billion. MONEY rating: Buy

Long-term investors seeking safe income can't do much better than this no- load, currently yielding 7.2%, which we rate a buy. With its cut-rate expenses (0.28% of assets a year, lowest in its class) and strict ban on risky derivatives, this Vanguard fund has returned an annualized 8.7% over the past < five years to Sept. 1, topping 98% of mortgage-backed bond funds. Manager Paul Kaplan, 47, took over the fund in March after serving as an assistant to his predecessor Paul Sullivan for 16 years. The fund had a 2.3% loss through Sept. 23, vs. a 3.9% drop for the typical mortgage-backed bond entry. In today's dicey interest-rate environment, Kaplan acquires a mix of new bonds and older issues with slightly higher coupons; the portfolio's duration is 8.6 years. While he could pay extra to buy bonds with higher current yields, he believes they run the risk of being redeemed early if interest-rate declines set off another wave of mortgage refinancing. And in his view, rates will notch up a bit further and then begin drifting down again sometime next year. "We never make an investment decision merely to maximize income," he says. "Rather, we strive for the best total return." And that, after all, is what investing is all about.

PIMCO TOTAL RETURN Assets: $5.9 billion. MONEY rating: Buy

Mutual fund analysts have dubbed William Gross, 50, the Peter Lynch of bonds. And like the legendary stock picker who put Fidelity Magellan on the map, Gross is eclectic. He fills this no-load intermediate-term portfolio with a mix of securities -- 650 in all, at recent count -- ranging from Ginnie Maes to European debt. The fund's 10.2% annualized return over the past five years beats 96% of its competitors in Morningstar's corporate bond category. But even Gross didn't survive this year's bond market bust unscathed. The fund fell 3.8% from January through Sept. 23, largely, Gross admits, because he held on too long to faltering European government bonds, which constituted up to 20% of the portfolio in April. Anticipating fairly steady interest rates over the next two to three years, Gross has shifted from seeking capital gains to emphasizing solid high yields. He's loading up on bargain-priced Ginnie Mae and Freddie Mac mortgage securities that yield about a percentage point more than U.S. Treasuries. The portfolio now has a duration of 4.5 years and offers a high current yield of 6.5%. Kurt Brouwer, president of Brouwer & Janachowski, an investment advisory firm in San Francisco, praises Gross for his overall grasp of the bond market. "For intermediate bonds, this is the best fund around," says Brouwer. PIMCo earns a buy.

KEMPER U.S. GOVERNMENT SECURITIES Assets: $5.3 billion. MONEY rating: Hold

Manager Patrick Beimford, 44, has been pursuing a less risky strategy at this 4.5%-load fund since his big bet on declining rates in 1992 backfired, saddling the fund with a 2.3% loss in that year's first quarter. To reduce the fund's sensitivity to interest-rate swings, he has converted it to a pure Ginnie Mae portfolio (it had held more volatile long-term Treasury securities as well) and capped the fund's duration at 5.5 years (it had been as high as seven years). And he is now willing to retreat into cash when interest rates climb sharply. While these safety measures may limit potential gains when rates fall, Morningstar analyst Natalie Andrus says they represent a net improvement for shareholders. The fund warrants a hold.

BOND FUND OF AMERICA Assets: $5.1 billion. MONEY rating: Buy

This high-quality corporate bond fund hasn't lost money in a calendar year since it was launched in 1974 (a record shared by only one of the eight oh 20- year histories). But 1994 may end that streak. As rates soared this year, BFA's emphasis on total return over high current income (lately 7.2%) saddled shareholders with a 4.3% loss through Sept. 23. Lead manager Abner Goldstine, 65, and his team at Capital Research have shortened the fund's duration to five years from 9.8 years in January. Catherine Voss Sanders, an associate editor of Morningstar's Mutual Funds, thinks this move will return BFA to its winning ways for '95 and beyond. We rate it a buy.

VANGUARD MUNICIPAL INTERMEDIATE-TERM Assets: $5 billion. MONEY rating: Buy

Ian MacKinnon, 46, and Chris Ryon, 38, have deftly steered this no-load intermediate-term municipal bond fund in bad times as well as good. During the bull market of 1991 to '93, the twosome extended the portfolio's average duration to 6.5 years -- a year longer than that of a typical intermediate- term muni fund -- counting on rising bond prices to produce capital gains. Result: a 10.8% annualized return during that three-year span, vs. 10.3% for the typical national muni fund. But late last year, sensing an end to falling rates, they shifted gears; by midyear 1994, they had brought the portfolio's duration down to a risk-dampening 5.1 years. That move limited 1994 losses to 1.5% through Sept. 23, vs. 4% for the fund's average competitor. Believing the worst of the interest-rate rise is over, senior manager MacKinnon, in charge since 1981, has lately erased the fund's "bearish tilt" by extending duration to 5.8 years. "We look to the current weakness in the market as a buying opportunity," he says. Management's superb record, plus bargain-basement expenses of 0.19%, earn this fund a buy. One more thing: Like all Vanguard funds, this one eschews risky derivatives.

DREYFUS MUNICIPAL BOND Assets: $3.8 billion. MONEY rating: Sell

This year's rising interest rates turned out to be a double-barreled menace for no-load Dreyfus Municipal Bond. The fund's long duration of 9h years (vs. 8h for the average national muni fund) exposed it to sharp bond-market price declines. And an 11% stake (as of February) in the risky derivatives known as inverse floaters deepened those losses when the market for those synthetics went splat.The sorry result: a loss of 5.6% through Sept. 23, vs. 4.1% for all national muni bond funds. Richard Moynihan, 59, who has managed the fund since its inception in 1976, has pared derivatives to 5% of assets. Why not unload all of them? He insists they will help boost yield during what he expects to be a year or more of relative interest-rate stability. Partly because of its long duration, the fund's 5.8% current yield is about a percentage point above that of the average national muni bond fund. But we rate this no-load a sell, because we believe investors are better off in less risky, intermediate-maturity funds that don't use derivatives. Example: Vanguard Municipal Intermediate-Term, profiled above.

CHART: NOT AVAILABLE CREDIT: Source: Morningstar Inc CAPTION: SIZING UP THE BIGGEST FUNDS