IN MY COLUMN OF JUNE 13, I SAID THAT DREYFUS'S PREMIER BALANCED FUND (1-888-338-8084) CARRIED NO LOAD, OR UPFRONT COMMISSION. IN FACT, ONLY THE RETIREMENT VERSION (R) HAS NO LOAD. LOADS FOR OTHER VERSIONS OF THE FUND RANGE FROM 1 PERCENT TO 5.75 PERCENT. (PUBLISHED 06/20/99)

Except for the very youngest, all investors should have a mix of stocks, bonds and cash in their portfolios. That's hardly a surprise. But did you know that you can own all of these diversified assets in a single mutual fund?

The convenience of such hybrid funds is attractive, but beware: While they claim to be safe, many are actually dangerous.

The idea behind owning different assets is to dampen the risk, or volatility, of your portfolio. If you own only stocks, you'll get a higher average return over time than if you hold some stocks and some bonds; but from year to year, your returns will bounce up and down in a scary fashion.

Unfortunately, many hybrid funds are even riskier than stock funds--and get lower returns to boot. The reason is that hybrids encourage the worst kind of market timing--the process of guessing where prices will go in the short term--by allowing their managers wide latitude in moving money from one asset to another.

As a result, the only hybrids I recommend are called "balanced" funds, which must keep at least 25 percent of their assets in bonds or cash but which usually hold around 40 percent. By contrast, "flexible" funds have no rules at all. And "asset allocation" funds fall somewhere in the middle, with only minor restrictions.

"Balanced funds," writes an analyst for the Value Line Investment Survey, "are . . . most suitable for the less-lion-hearted investor . . . who wants exposure to capital growth offered by stocks along with the constant cushion (and current income) provided by bonds."

Current income--meaning dividends from stocks and interest from bonds--is one feature that owners of these funds demand. The typical balanced fund recently was generating annual income amounting to 2.1 percent of its price-- that's nearly twice the dividend yield of the typical all-stock fund.

A good balanced fund can be very good indeed. In fact, I doubt there is a mutual fund of any sort that has met its objectives better than Dreyfus Premier Balanced (1-800-221-1793). For each of the six years of its existence, it has finished in the top quintile (top 20 percent) of its peer group. Overall, it is in the top 2 percent, with a top ranking ("1") from Value Line for both high performance and low risk.

The fund tends to keep roughly half its assets in stocks and half in a combination of bonds and cash (cash being a term denoting very short-term debt securities, such as Treasury bills, commercial paper from corporations and certificates of deposit from banks).

The stock portion of the portfolio is managed by Ron Gala, who spreads his money over lots of companies, mainly of the large-cap growth variety, such as Microsoft Corp. (MSFT) and Wal-Mart Stores Inc. (WMT). The bond portion is run by Laurie Carroll, who keeps quality high and maturities fairly short.

The holdings, then, are truly balanced--hot stocks and cool bonds. This is no guarantee against short-term loss, but declines, when they come, tend to be brief and shallow. For example, during the June-to-September bear market last year, the Standard & Poor's 500 index of large-cap stocks fell 9.9 percent, but the Dreyfus fund fell only 1.6 percent. During the same period, Oppenheimer Multiple Strategies, an asset-allocation fund, dropped 10.4 percent, and Templeton American Trust, a flexible fund, dropped a whopping 16.7 percent.

The third quarter of 1998 was the only quarter since April 1994 in which the Dreyfus fund suffered a loss. That's good news not only for the "less lion-hearted investor" but for every investor. All of us are susceptible to panic when markets turn nasty. And panic usually means selling--often at the bottom--when holding is the prudent course. Investors should be happy to give up a few points in performance to avoid stomach-churning volatility.

How many points? Maybe "a few" is an understatement. Over the past five years, Dreyfus Premier Balanced has returned an annual average of 18 percent, compared with 24 percent for the S&P 500 and a mere 12 percent for the average balanced fund.

You have to admire a fund that's balanced 50-50 between stocks and bonds, that has exceptionally low volatility and that still manages to score returns that are three-quarters as high as the returns of the large-cap stock index. Dreyfus, with no upfront or back-end load--that is, commission--has all these qualities, plus a low expense ratio (1 percent vs. 1.4 percent for its peers).

There are others worthy of attention among balanced funds:

* Dodge & Cox Balanced (1-800-621-3979): One of my all-time favorites, this fund is super-conservative, leaning toward large-cap value stocks--that is, bargain-priced companies--in its equity portfolio, including Motorola Inc. (MOT), Dow Chemical Co. (DOW) and Sony Corp. (SNE). Probably the oldest public hybrid fund still in operation, Dodge & Cox, based in San Francisco, was started in 1931 and, over the past 20 years, has produced average annual returns of 14 percent, less than 4 percentage points below the S&P 500. The expense ratio is a mere 0.55 percent. So far this year, it's substantially ahead of the S&P 500, with gains of 11 percent.

* Mairs & Power Balanced (1-800-304-7404): Another veteran fund (founded in 1961), this one generally holds 60 percent of its assets in stocks and 40 percent in bonds. A tiny, undiscovered fund--just $38 million in assets, compared with $6 billion for Dodge & Cox--Mairs & Power buys only dividend-paying stocks, such as Pfizer Inc. (PFE) and J.P. Morgan & Co. (JPM), and holds a stock portfolio that is more concentrated than that of the average balanced fund, but, surprising, with lower risk as well.

* American AAdvantage Balanced (1-800-338-3344): This is an unusual fund managed by AMR Investment Services Inc., a subsidiary of AMR Corp., which owns American Airlines. It has five separate firms as sub-advisers--the ones who make the decisions--including Hotchkis & Wiley and GSB Investment Management Inc. Risk ratings are very low, and so are expenses--just 0.6 percent. Last year, allocations were 59 percent stocks, 40 percent bonds, 1 percent cash.

* MFS Total Return (1-800-343-2829): The advantage of this fund is its record of high income. Current yield is 3.5 percent, a rate more than half-again higher than average. The reason is not merely bond holdings (typically, 30 percent to 40 percent of the portfolio), but value stocks with high dividend yields, including Exxon Corp. (XON) and Philip Morris Cos. (MO).

Most balanced funds are as well-behaved as MFS, which fell only 3.9 percent during the rotten third quarter of 1998 and still managed to triple in value in the preceding eight years. By contrast, many flexible and asset-allocation funds--with their broader mandate to move among stocks, bonds and cash--have performed miserably in all sorts of conditions.

Consider U.S. Global Megatrends (1-800-873-8637), a flexible fund managed by Stephen Leeb. For the third quarter of 1998, it fell 15.9 percent and gained only 2.3 percent for the year (26.3 percentage points behind the S&P 500). For the past five years, Leeb has notched returns averaging less than 10 percent--and at risk levels 50 percent higher than Dodge & Cox and an astronomical expense ratio.

Adding insult to injury, Leeb has passed on capital gains to his shareholders totaling $3.86 over the past two years, for a fund that trades at an average of $11 a share. That's an ugly tax bill.

Between October 1990 and June 1998, as the S&P 500 returned 357 percent, the average flexible fund returned just 173 percent. Asset-allocation funds did even worse, at 161 percent.

But the big problem with such funds is that you have no idea what you are buying. Tocqueville Fund, a flexible fund that aims to achieve its returns with minimal risk, dropped 19.3 percent in the second and third quarters of last year and managed to finish 1998 with a loss. It has bounced back in 1999 but has proven very volatile. After all, 95 percent of its assets are in stocks--but that could change any minute.

The truth is, most hybrid funds simply don't deliver what they promise. Instead, they provide an excuse for managers (or computers) to indulge their market-timing fantasies.

So be picky when you buy such funds. Read the prospectus and be sure that asset allocations, by history and by stricture, are fixed. A mixture of 60 percent stocks and 40 percent bonds (or thereabouts) is fine, especially for older investors, but unless you trust the fund, it's a recipe you may have to cook up yourself.