How the small saver can soften inflation's blow

With inflation rocketing around 13 to 15 percent on an annual basis, savings in accounts which bring only 5 1/4 to 6 1/2 percent obviously fall behind. If you have $10,000 in cash, you can earn higher rates with Treasury bills of high yield certificates of deposit. But where does a small saver go for protection?

Money market mutual funds offer relatively high yields -- averaging 12.63 percent for November 1979, according to Donoghue's Money Fund Report. Total money invested in money funds hit a record high of $41.9 billion on Nov. 28, 1979. Money market funds are mutual funds that invest in short-term money market instruments.

Most of the funds require a minimum $1,000 initial investment with $25, $50, Franklin Resources Liquid Assets and Midwest Income Investment Company, that accept $500 minimum initial deposits with $100 subsequent deposits.

Also, three stockbroker-related funds accept any amount as initial or subsequent deposits. Some of the other services, such as check-writing, wire redemption, and exchange privileges offered by other funds may not be available with low initial deposit funds.

Money market funds are easy to use, but not as easy as walking into a bank or savings and loan on the corner. You must do these things yourself:

* Select a fund from among the more than 70 now operating.

* Write or phone for an application and prospectus.

* Complete the application. (It's easy.)

* Send money in the preferred form (cashier's check, wire, or other) to the custodian bank noted on the application.

Depending on the mutual fund, you may then write checks directly within the limits specified in the application agreement (usually at least $500 with a minimum reserve) or telephone of money to be wired to your bank. You may also write for cash.

For information to help you select a fund, consult a free member list issued by the No-Load Mutual Fund Association, Valley Forge, Pa. 19481.

Money market funds operate on a "no-load basis" which means that there is no sales charge and no redemption fee. Expenses and fees for operating the funds are paid from the income, but the quoted yields are the net to the investor. Shares are typically $1 each, and the value is kept constant by varying the yield. Thus, expect no appreciation.

Yields from money market funds will likely remain high only as long as general interest rates remain high. But since there is no time limit on money market shares, your cash can be withdrawn at any time.According to William Donoghue, "Mutual funds tend to hold higher yields longer than other investments with high liquidity."

For savings accounts of less than $500, look for a credit union. Most credit unions pay at least a full percentage point higher interest than passbook accounts in banks and savings and loans. One caution: Be sure to as about the payment of interest on credit union accounts, as many do not compound interest daily and may pay less interest on funds with numerous in-and-out transactions during a quarter than a savings bank paying day-of-deposit-to-day-of-withdrawal interest.

Once you collect $500 or $1,000 in a savings account, transfer the funds to one of the money market funds and keep only the absolute minimum in a savings account for emergencies or for paying scheduled big bills. Attempting to gain a higher yield by investing in a long-term certificate of deposit (CD) with one-of-eight-year terms can be self-defeating for two reasons: You may lose the extra yield through penalties if you should have to withdraw funds early, and being locked into a long-term CD could keep you from realizing better investment performance.