* Money fund assets level off as retail investors sit tight
* Advisers see few safe alternatives for cash
By Ross Kerber
June 5 (Reuters) - The miniscule interest rates being paid by money market mutual funds are making many investors restless, but wealth advisers are urging most to stay the course.
Already historically low U.S. short-term interest rates have dipped even lower in recent weeks as investors fleeing financial turmoil in Europe have sought safe havens.
But investors have little to fear that rates could turn negative on money market funds, and alternatives like bank savings or checking accounts are no more appealing, advisers said.
"Everything that is stable is crummy," said Douglas Conoway, managing principal of Wealth Management Group LLC in Rochester, New York. "There's no place to go."
Conoway's firm invests about 5 percent of its $40 million in client assets in money funds, the same level as a year ago.
The stability of money funds does not mean investors are happy with their rates. John T. Boland, president of Maple Capital Management Inc in Montpelier, Vermont, said clients often call to complain about low rates, which he said "have given a whole new meaning to the phrase 'cash drag.'"
But there are not a lot of alternative investments he can suggest -- "which is why we are holding the cash in the first place!!" Boland wrote in an email.
Low interest rates have already forced fund sponsors to waive billions of dollars in fees to prevent yields from going negative. Fund companies have the resources to keep waiving fees and maintain yields above zero, said Peter Crane, publisher of Cranedata.com, a website that tracks the industry.
"If they haven't gone negative by now, guess what, they're not going negative," he said.
By some measures, the pressures on fund companies are easing despite the safe-haven flood into short-term U.S. government securities. While rates on Treasury bills declined, rates on other investments the funds buy such as repurchase agreements have ticked up.
Big fund sponsors like Fidelity, Federated Investors Inc and JPMorgan Chase & Co on average waive 45 percent of fund fees, down from 50 percent several months ago, Crane said.
The desire for safety should be paramount, said Philip Blancato, chief executive and president of Ladenburg Thalmann Asset Management in New York. "While there is little yield available in the market today, we continue to believe safety of assets is more important than yield," he said.
A few advisers have tried to come up with alternatives to money funds. In Westport, Connecticut, Gerard Gruber, chief investment officer of Hayden Wealth Management, said his firm might suggest a combination of municipal bonds, fixed annuities or dividend-paying stocks and funds. Only the safest money funds pass its screens, such as those that invest in government-backed instruments.
"Our clients are willing to accept a lower money market rate that invests conservatively than be with one that takes more risk and has exposure to possible losses," he said.
In Michigan, financial planner Theodore Feight said he has started replacing money fund holdings with dividend-paying stocks like those of Intel Corp and Altria Group . He also has bought high-yield corporate bond exchange-traded funds.
"Money market rates are just not cutting it anymore," he said.
Hoping to capture flows, some firms have pitched new products as money fund alternatives. On a web page about a new fund, for instance, Pacific Investment Management Co, operator of the world's biggest bond fund, writes: "PIMCO Short Asset Investment Fund offers higher income potential than traditional cash investments. ... Unlike money markets, however, the net asset value (NAV) of the fund may fluctuate."
Many of the new funds fall into the category of "ultra short obligation bond funds" tracked by Thomson Reuters' Lipper unit. Flows to these funds totaled $2.2 billion through the end of May, on pace to surpass the $3.4 billion they took in for all of 2011.
Still, that is just a drop in the bucket compared with money fund assets overall. The funds held $2.55 trillion at May 29, down from $2.65 trillion at the start of the year, according to iMoney.net. (Editing by Aaron Pressman and Leslie Adler)