The smiles on the faces of mutual fund managers are once again brightening the investment community. For years -- through much of the 1970s and the early '80s -- mutual funds were in the doghouse as investors remembered the down years of the previous decade. The money market funds provided about the only bright spot in an otherwise dismal picture.

But investors suddenly seem to have discovered the magic of mutual funds all over again. If sales continue at their present torrid pace, it is possible that the totals for 1985 will come close to doubling the old record, set just last year.

This new popularity is the result of a combination of events. Investors used to double-digit returns on money market accounts, money market funds, Treasury obligations and other fixed-return media are looking for other places to put their money now that interest rates have dropped substantially.

The explosive growth in IRAs brought a fair share of the IRA billions to mutual funds. This new money was predominantly earmarked for money market funds in the beginning, but more and more of it is now finding its way to stock and bond funds, also due in large measure to the drop in money market yields.

Still another factor in the move to mutuals has been the erratic behavior of the market in the last couple of years. Since the beginning of the present bull market in August 1983, the trend has been upward. But we never find an uninterrupted climb -- the movement is erratic, and the sometimes wild gyrations have been upsetting to many people.

As a result, more and more investors have been turning to the professional managers of the funds for help. The managers have responded by providing a constantly growing universe of funds from which to choose. Selection of a fund that conformed to your personal investment objectives was once a fairly simple matter.

Even with perhaps as many as 500 different funds, there were really only a few types, principally either income or growth. Of course, there were variations within each group -- different levels of speculation, load or no-load, taxable or tax-free. But the selection process was relatively simple compared with today's mutual fund world.

To provide vehicles for the growing number of fund investors, and particularly the increasing participation of more sophisticated investors seeking professional management, fund sponsors have been introducing a wide variety of specialized funds to meet the needs -- or the wishes -- of this whole new world.

These so-called "sector" funds pinpoint particular segments of the market, and are designed to take advantage of a characteristic, more pronounced in the last few years than in the past, that I like to call "rotating heights."

That is, one particular section of the market will move up dramatically while the rest of the market is quiet. Then that segment drops and another one takes center stage and gets all the action. A few years ago, the oil stocks were hot, then technology was the favorite for a while, followed in turn by health industry stocks.

The idea is that if you can move your money from one sector to another and catch each high as it rotates from one area to another, you'll come out ahead even if the overall market goes nowhere. To make it possible to use mutual funds in this kind of rollover strategy, fund managers have provided what can only be called an explosive proliferation of specialized funds.

Take your pick: energy, information technology, health and medicine, defense, entertainment and leisure, utilities, and on and on. If you want to move out of the general stock fund area, you can find funds that specialize in convertible preferred stocks and convertible bonds, mortgage securities such as GNMA, options and futures, Treasury zeros, high-risk "junk" bonds -- in short, funds that will match just about any imaginable investment strategy.

I've always liked mutual funds, particularly for the unsophisticated investor with a relatively small stake. But selection of the right fund vehicle for your particular needs -- always very important -- has now become much more difficult. The last word: Don't be stampeded by promises of spectacular returns, or by threats that you'll miss the boat. Take your time, read the fund prospectus carefully, and find the single fund or fund family that matches your personal investment goals.