Mass Redemption Is a Mutual Fund Risk

In the Mutual Funds column, “Industry Is Unlikely to Have S&L-Type; Troubles” (May 26),Russ Wiles makes clear that the mutual fund industry is probably not vulnerable to the stupidity-cum-cupidity that sank the S&L; industry.

Perhaps I’m paranoid, but isn’t there another kind of risk, unique to funds: a very large pool of uninsured money, representing holdings by many individuals who are not sophisticated investors--”weak hands” in Wall Street parlance.

Imagine a run on the funds by such investors spooked by the collapse of a money center bank or major insurance company, or an unexpected default on an investment-grade debt. Such an event might well be containable by central banks and regulatory agencies, but with wide media coverage, isn’t it likely to trigger massive redemptions by holders emotionally driven to preserve their uninsured investments?

Such a financial Chernobyl would probably spread quickly through the fund industry, magnified by inter-fund borrowing within fund families, and disrupting securities markets as fund holdings are liquidated to raise cash. It seems unlikely that the seven-day redemption delay rule would do much to halt such a meltdown.

Sure some of this occurred in October, 1987, but it was short-lived. Today there are many more funds managing much larger amounts of money for many more people.

Not all fund investors are small or uninformed, but one has the gut feeling that as fund popularity has increased since 1987, the number of inexperienced investors has risen disproportionately.

Should we worry?

JERRY H. WERLIN, Los Angeles