Marketing investments to a jazz beat

James Benham is chairman of Benham Management Corporation, a Palo Alto, Calif., mutual fund company. He also plays a pretty fair fluegelhorn and trumpet.

A few years ago, Mr. Benham helped some friends, co-workers, and professional musicians form a jazz band, called Full Faith & Credit. It has 19 musicians and one singer who bring a lively big-band sound to the San Francisco area. They have also turned out two record albums.

If the band's name does not seem particularly musical, it does reflect the investment philosophy of Mr. Benham's two money market funds, Capital Preservation Fund I and II. ''Full Faith & Credit'' also indicates one reason money funds like his have had such tremendous growth in the last several months.

The Capital Preservation Funds are two of 18 money market funds that invest only in US Treasury issues. The 28 other ''government only'' funds invest in securities of other federal agencies in addition to Treasury securities. Only Treasury issues, though, are considered to be backed by the full faith and credit of the United States, hence the name of the band.

The dozens of other money market funds invest in commercial paper, bank certificates of deposit, and other short-term investments, as well as US government issues.

Full Faith & Credit not only draws jazz buffs, but the idea behind the name is also attracting a growing number of investors to the concept of government-backed security. A substantial number of these people are new to money funds. Many were worried that money funds don't carry deposit insurance, such as banks get from the Federal Deposit Insurance Corporation.

''Many of the people who have come into money funds in the last year or year and a half have been less sophisticated investors whose only previous investment was in a passbook savings account,'' said John Guffey, president of the First Variable Rate Fund for Government Income, in Washington, D.C. ''They often didn't know what a bank CD (certificate of deposit) was.''

While the financial industry was watching the assets of all money market funds go over the $200 billion mark earlier this month, the government-only funds have grown about nine times as fast. They have blossomed from $11.9 billion in assets in early January to $18.3 billion at the beginning of this month, up more than 53 percent, according to figures compiled by Donoghue's Money Fund Report. In that same period, money funds as a whole grew less than 7 percent.

Also, during the same period, several mutual fund companies introduced government-only money funds.

When Sears, Roebuck & Co. decided to use its Dean Witter Reynolds subsidiary to offer a money fund in February, it chose to go with a government-only fund instead of a ''general purpose'' fund. General-purpose funds invest in commercial paper, such as bank certificates of deposit and short-term corporate notes.

In the first month after the Sears fund was announced on Feb. 23, it pulled in over $100 million, an official of the fund's marketing department said. So far, the fund has been available only through the mail, by phone, or at Dean Witter offices. Starting next month, Sears will test market the fund in seven or eight of its stores.

''The easiest thing to sell is a government securities fund,'' William E. Donoghue, publisher of the Money Fund Report, said. ''There is a strong interest in a flight to safety.''

Even within the government-only funds, there is some debate about which is safer. While Treasury funds tout the full faith and credit of the government, funds that also invest in securities from government agencies, such as the Small Business Administration and the Federal Home Loan Mortgage Corporation, are backed by the ''moral obligation'' of the government. These offer slightly higher interest rates. While both fund types are considered very safe investments, Treasury funds are given slightly higher marks for security.

''On a scale of 1 to 100 for safety, I would put Treasury funds at 99 and the others at 98,'' Mr. Guffey, of the First Variable Rate Fund, said. His fund invests in both types of securities.

For people sending their money into these funds, security seems to be first priority. ''When we're in a recession like this,'' Mr. Benham said, ''people [ with] money to invest in the markets become more safety conscious . . . . We've seen several examples of businesses in difficulty: Braniff, Wickes, International Harvester. Every time one of these things comes up, they make people more conscious of safety.''

Another reason for the growth of government-only funds, industry observers believe, is the availability of individual retirement accounts (IRAs) to almost all Americans this year. For people opening these accounts, safety comes ahead of yield where their retirement money is concerned. Lately, most government-only funds have been earning one-half to two percentage points less than the general-purpose funds.

But others are not so sure the safety of government-only funds has much additional appeal. At Delaware Management Company Inc., a Philadelphia mutual fund, a government fund was introduced in May. Market surveys for that introduction received two surprising views from customers, Richard Vesely, Delaware's marketing vice-president, said.

The first was that many people did not think the added safety was worth giving up the percentage point or two in interest. The second response -- even more surprising, Mr. Vesely said -- was an attitude of ''What's the big deal about the government? What's so safe about government paper?'' He noted that almost all general-purpose money funds only invest in commercial paper from companies carrying the highest possible bond ratings. And their certificates of deposit generally come from banks with equally high ratings.

Mr. Vesely said the survey may help explain why response to Delaware's Treasury Reserves fund has been quieter than expected.