Last August I wrote about the phenomenal resurgence of mutual funds in the past couple of years. To give you some idea of how amazing that resurgence has been, the Investment Company Institute (the trade association for mutual fund companies) reports that sales for 1985 totaled well over $110 billion.

That figure doesn't include money market funds or short-term tax-free funds -- just the various types of stock and bond funds. And that $110 billion looks even more gigantic when compared with sales of about $2 billion in each of the years 1980 and 1981, $8 billion in 1982 and $25 billion in 1983 and 1984.

Of course, more and more people are recognizing the advantage of mutual fund investing -- things like diversification, professional management, ease of investment, liquidity. But that's an old story -- why the sudden spurt in interest?

I think a major reason is the steep drop in interest rates over the last few years. Investors got used to the idea of double-digit returns on money market accounts, certificates of deposit and even Treasury bills. Faced with yields in the 7 to 8 percent range, people are looking around for a better place to put their money.

Even those whose conservative instincts led them to CDs and T-bills were sorely tempted by a new type of mutual fund -- one that invested in government-guaranteed securities like GNMA mortgages and thus could offer virtually the same level of safety as a certificate but with a higher yield.

In that earlier article, I mentioned sector funds -- a fairly new member of the fund community that permits the investor to move his money among funds that invest in particular segments of the market, like energy, high-tech, health care, utilities, and so on.

Because of limited space, I didn't explore the world of sector funds at length. I want particularly to point out that the use of sector funds requires you to stay abreast of changing conditions on the securities markets. Although sector funds still provide three of the four advantages I mentioned earlier, diversification is substantially more limited because the fund portfolio is concentrated in a single industry group -- which, of course, is why it's called a sector fund. Although you do get diversification within that group, you do not get the risk-reducing spread over a number of groups that was always (rightly) a part of the mutual fund sales pitch.

If your reason for going to mutual funds is to turn management of your money over to someone else -- a professional with access to information and the time to study it -- then I suggest you stay away from the sector funds. Investing in them requires that you spend time watching the markets and picking the right times for moving from one sector to another.

Reg Green points out in his Mutual Fund News Service that balanced funds may be the right place for someone who wants a little more action than is found in funds that are properly defined as either growth funds or income funds. A balanced fund usually is not adventurous enough for an honest-to-goodness market speculator, and may be a little too risky for the very conservative.

But for someone looking for a chance at a better-than-average return at relatively low risk, a balanced fund may be just the right answer. Because the prospectus of a balanced fund offers management an unusual amount of freedom to move money among equities, fixed-income investments and even money market paper, you can get some of the feeling of sector funds without having to keep an eye on conditions yourself.

This opportunity for movement -- assuming the fund managers call the shots correctly -- should mean rising share values in a bull market plus protection against a really painful drop when the market goes the other way.

Q: I retired in late 1985 but received a lump-sum payment for unused vacation time in 1986. I will have no other earned income this year. May I use the 1986 lump-sum payment for a 1986 IRA?

A: No. The lump-sum payment for accrued leave is taxable income, of course; but it is considered a form of deferred income rather than earned income, and therefore does not qualify for an IRA contribution.