(MONEY Magazine) – MONEY FUND ALERT Although the collapse of the $84 million Community Bankers U.S. Government money-market mutual fund in September harmed only institutional customers (who lost 6% of their principal), individual investors could get hit next. "I'd be surprised if it didn't happen to a retail money- market fund someday," Securities and Exchange Commission member Richard Y. Roberts told MONEY. This year, 16 fund sponsors have had to bail out retail money funds to help them keep their sacrosanct $1 net asset values after the funds lost money on derivatives -- complex securities whose worth is "derived" from some other asset or indexes. But in the future, warns Roberts, "not every sponsor is going to step up to the plate to make good the losses." Narrowing his focus, he adds: "I expect the next round of problems to pop up in the tax- exempt area." Derivative-laden tax-free money funds have ducked major damage so far, he says, only because muni rates have not risen as sharply as taxable rates. But if muni rates spike up, funds holding the diciest derivatives could be hit hard. In addition, he says, banks and brokerage houses continue to devise new derivatives for the tax-free market that may turn out to be riskier than they appear. How can you protect yourself? One tip-off to potential danger, says Morningstar Mutual Funds publisher Don Phillips: "If a fund's yield is markedly better than its peers', and its expenses are about the same, you've got to assume that the fund is taking more risk." Call your fund and ask about its use of derivatives. Avoid any fund that keeps more than 5% of its assets in such exotic securities as structured notes, COFI floaters and range floaters. Of course, there is no guarantee that you will get accurate answers. So fund experts suggest another precaution: Stick with money funds that have large, reputable financial houses standing behind them; presumably, sponsors - with deep pockets and a stake in maintaining public confidence in their products would be more likely than smaller outfits to make up money fund losses that can easily top $20 million. -- P.M.