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Earlier this month, the Calvert Funds of Bethesda, Md. disclosed plans to merge a pair of its state-specific municipal bond funds into a larger fund. The funds' small sizes - the larger of the two had about $14 million in assets, according to a March 10 SEC filing - were cited as the reason for the proposed merger.

Calvert is not alone. Mergers and liquidations are becoming common events among municipal bond funds, particularly single-state municipal bond funds. As investors have chased high returns in equity funds, municipal bond funds have suffered record redemptions, contributing to a steady shrinking in the number of municipal bond fund offerings.

"There was a lot of pain in the muni market last year," said Sarah C. Bush, an analyst for Morningstar of Chicago, the fund tracking firm.

That pain, due to rising interest rates and falling bond prices, showed up in the sales numbers for mutual funds that invest in municipal bonds. The assets in municipal bond funds declined last year for the first time since 1994, according to the Investment Company Institute. Assets fell nine percent in 1999 to $272 billion from $299 billion, the ICI reported. Municipal bond funds had $12 billion in redemptions last year, the ICI reported.

In December, municipal bond funds had their worst sales month ever, suffering approximately $7.2 billion in redemptions. The previous record for redemptions was November 1994, when municipal bond funds had $4.7 billion in redemptions. The erosion of assets continued in January, when municipal bond funds had their fourth worst month in history with approximately $4 billion in redemptions, according to the ICI.

The difficult year for sales in 1999 solidified what has become a trend in the fund industry. For the sixth year in a row, the number of municipal bond funds shrunk in 1999, the ICI reported. The number of municipal bond funds has decreased steadily from 1,012 in 1994 to 888 last year, the ICI reported.

In 1999, 39 municipal bonds funds were merged or liquidated, according to the ICI. Of those, 31 were single-state municipal bond funds.

A Calvert spokesperson did not return a call seeking comment on the firm's proposed mergers. Shareholders are scheduled to vote next month on the proposal to merge the Calvert Virginia Municipal Intermediate Fund and the Calvert Maryland Municipal Intermediate Fund into the Calvert National Intermediate Fund, according to a proxy statement the funds filed March 10.

Mergers and liquidations have become common as fixed-income investors increasingly appear to have turned to the equity market, according to fund executives and fund trackers.

"I think some fixed-income investors have been sucked into the vacuum of the stock market," said Robert Walstad, president of ND Holdings of Minot, N.D., a money management firm that offers seven single-state municipal bond funds. "Fixed-income investing has become passe for some people."

That phenomenon is only temporary, Walstad said. Investors will return to fixed-income products when markets turn, he said. And, state-specific funds will always appeal to a segment of the population because of the funds' tax benefits, he said. When fixed-income investing was hot in 1993, fixed-income state-specific funds had plenty of new investors, Walstad said.

"We will have our day in the sun," Walstad said. "They were just throwing money at us in 93. We're waiting for another 93. Where the heck is it?"