For safety, there's nothing like a money market fund that invests solely in U. S. Treasury bills. But the current yields, barely above 5%, are unappealing--especially after paying federal taxes. Now, two funds, the Permanent Portfolio Treasury Bill Fund and the Eaton Vance Short-Term Treasury Fund, help delay the tax bite.

Unlike conventional money funds, which keep their share value at $1 and pay interest daily, the tax-deferred funds retain the interest, so net asset value goes up a little each day. Investors earn their return through the appreciation.

SMALLER TAB. Shares in the Permanent Portfolio fund climbed 3.1%, to $64.79, from yearend through July 31. The 5.3% annualized gain is about the same return as that of conventional T-bill funds. The difference is, investors in regular funds will owe full 1991 taxes on the interest, while Permanent Portfolio investors will owe a small amount, if any. "Your interest compounds tax-free," says Terry Coxon, who runs the $300 million fund.

These funds comply with federal rules that mutual funds pay out all income. They do so via a complex accounting method that allows them to minimize reported income. For instance, in December, 1990, the Permanent Portfolio paid out 43~ per share, or 0.6% of net asset value, while the fund had a total return of 7.3%. So most of the return was deferred. In 1987 and 1989, there was no reported income. So holders who didn't redeem shares didn't pay taxes. The new Eaton Vance fund isn't yet a year old, but "the distribution will be less than with a conventional T-bill fund," says Executive Vice-President James Hawkes.

LONG-TERM TIP. For taxpayers in the highest brackets, there's an additional savings. As long as their shares are held for more than one year, they qualify for long-term capital gains tax treatment. That's a plus, since the maximum tax rate is 28%, vs. as high as 34% on ordinary income and short-term gains. And investors can use the capital gains in these funds to offset capital losses.

There are a few drawbacks. Each withdrawal is a "taxable event" which needs to be reported to the IRS. Coxon's fund has a $1,000 minimum purchase. It charges $35 to open an account, a $1.50 per month maintenance fee, and $1 per check. The Eaton Vance fund has a $5,000 minimum, and a 0.25% distribution fee.

Finally, both funds' yields run about half a percentage point below the three-month T-bill rate. But the security and tax deferral attached to these investments may make up for the relatively skimpy returns.

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