The average mutual fund return could fall to 15 percent this year, down from 20 percent to 25 percent over the past few years, according to Putnam, Lovell, de Guardiola & Thornton of San Francisco, an investment banking firm that specializes in the investment advisory sector.

Overall, however, the outlook for mutual funds and other investments in 1999 is positive, according to Putnam, Lovell. Mutual fund assets could surpass $6 trillion this year, the firm says. The mutual fund industry had $5.7 trillion in assets under management as of January, according to the Investment Company Institute.

However, the increase in assets will not be due so much to substantial returns as it will be to net new sales, according to Putnam, Lovell.

This year, only 37 percent of the increase in assets will be due to market gains, Putnam, Lovell says. But net sales will be strong, responsible for 63 percent of the growth in assets, the firm said. That is a big difference from what was behind asset growth between 1995 and 1998, when 46 percent was due to market gains and 54 percent due to net sales. If Putnam, Lovell's predictions are true, mutual funds will have to become far more aggressive marketers to offset the disappointing returns.

However, the slowdown in returns will not be across the board, said Dean Eberling, managing director and head of research for Putnam, Lovell, at a conference last month.

Money market funds and bond funds are likely to become more popular as equity markets become increasingly volatile, Putnam, Lovell executives said.

Putnam, Lovell predicts that new assets in money market funds will grow from $235 billion in 1998 to $250 billion in 1999, while new money being invested in bond funds will remain stable around $74 billion from 1998 to 1999. Meanwhile, money moving into equity funds should drop from $170 billion in 1998 to $147 billion in 1999, according to Putnam, Lovell.

This overriding preference for the stability of money market and bond funds should continue for a while because equity market volatility will continue, said Eberling. This volatility will be fueled by a number of factors, he said. They include: regulatory changes in over-the-counter markets; technological disintermediation, which allows institutional and retail investors to readily gain access to the markets; and competitive pricing.

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