Mutual Funds Lure Record Cash Flow : Securities: An industry group says investors continue to flee bank and S&L; accounts.

Investors poured a record $171 billion into long-term mutual funds last year, far eclipsing the prior record of $131 billion in 1986 and fueling a tremendous expansion of the fund industry.

The Investment Company Institute, the funds’ chief trade group, said net new cash flow into stock funds was a record $77.9 billion, double the 1991 total and nearly four times the peak annual inflow of the 1980s.

For bond funds, net new cash flow totaled $93.3 billion, 39% above 1991 levels but below the all-time high of $108.6 billion in 1986.

Net new cash flow represents a “pure” measure of money rolling into the funds because it subtracts investor redemptions, reinvested fund dividends and exchanges of money among funds in the same company.

Overall, the 1992 record inflow reflects individual investors’ unprecedented shift of assets from bank and savings and loan accounts to stocks and bonds. With short-term interest rates near 30-year lows and real estate still in a slump, stock and bond markets offer the only logical alternative for many people searching for a decent return on their money.

The ranks of fund buyers continued to swell in January, many funds report. “January was the greatest month we’ve ever had,” said Richard Strong, founder of $4.6-billion-asset Strong Funds in Milwaukee. The giant Vanguard Group in Valley Forge, Pa., also said stock and bond fund purchases set a record in January.

Despite the surge of cash, the fund industry shows no sign of being overwhelmed by the money. Cash is being promptly invested--which is reflected in the stock market’s continuing gains and the ongoing rally in bonds.

Yet the tidal wave of dollars into long-term mutual funds is as much a source of anxiety as elation for the industry, some fund executives concede. Their great fear is that millions of new fund investors don’t clearly understand the risks of stocks and bonds, and will repeat the debacle of late 1987 and 1988--fleeing the funds, at substantial loss, when markets begin to turn rough.

However, many fund veterans contend that stock and bond fund buyers are far more sophisticated than their critics allow.

Higher potential returns are only part of the lure of the funds, said John Brennan, president of the $102-billion-asset Vanguard Group. He argues that the industry’s heavy emphasis on customer education and service has forged a strong fund-client link that won’t be broken by bear market interludes in stocks and bonds.

“I think people have found a more efficient and client-friendly industry” than what banks and S&Ls; provide, Brennan said.

Fund officials also note that most investors are choosing conservative, slower-growth stock funds rather than the highest-risk stock funds--a sign that investors are interested in long-term returns, not in playing short-term market gyrations, the industry argues.

Gross purchases of more conservative growth-and-income stock funds totaled $51.6 billion last year, more than double the $24.1 billion in gross purchases of higher-risk aggressive growth stock funds.

With the huge inflow of money, assets of all mutual funds reached a record $1.6 trillion by Dec. 31, up from $1.35 trillion a year earlier. The number of funds ballooned to 3,857 at year’s end from 3,423 a year earlier.

The industry’s growth has made it one of the few business sectors in America on a major hiring binge. Employment at the Vanguard Group, for example, has soared to 3,100 from 2,500 a year ago. In New York, the Oppenheimer Funds group raised its head count 20% last year, to 1,200.

Stock Fund Stampede

Investors poured a record $77.9 billion net new cash into stock mutual funds last year, double the 1991 total. Stock funds’ net new cash flow (in billions): 1984: $5.9 1985: 8.4 1986: 21.9 1987: 19.1 1988: -16.2 1989: 5.8 1990: 12.8 1991: 38.3 1992: 77.9

Net new cash flow measures investor purchases less redemptions and reinvested dividends, and after accounting for exchanges among funds.

Source: Investment Company Institute