When the Feeling Isn’t Exactly Mutual : Mutual funds can be a great investment, but consumers don’t always understand the risks

It used to be that accumulating a nest egg was as simple as opening a bank account or buying a few stocks. Not so today. A vast array of financial products such as mutual funds and annuities is now widely available from banks, brokerages and other financial services companies. These products are attractive as higher-yielding alternatives to low-interest bank accounts and time deposits. But they can also be confusing and risky.

With the huge amount of money--$69 billion last year--going into mutual funds sold by banks and S&Ls;, consumers need to be more fully informed of the risks. Greater consumer safeguards are in order. That is a must-do task for federal bank regulators and Congress.

Take this test: Is that mutual fund or stock you purchased from a bank insured like a savings or checking account? If you answered yes, you’re wrong. But you’re not alone in your lack of information.

A survey of 1,000 bank customers by a securities administrators group showed that only 18% were aware that mutual funds are not covered by federal deposit insurance; only 25% knew that stocks sold by banks are not covered by insurance and 14% were aware of the same lack with annuities, which are investment contracts.

Confusion abounds despite extensive publicity and voluntary efforts by federal regulators and savings institutions to educate the public about the potential hazards of uninsured investments.

A coalition that includes the North American Securities Administrators Assn., the Consumer Federation of America and the American Assn. of Retired Persons is seeking simple-English disclosures of risks and guidelines for how banks sell and label mutual funds and stocks. The goal is to differentiate them from regular bank accounts so that investors better understand that not all products sold by banks are insured by the federal government.

The distinction is especially needed considering that banks and savings and loans sold about 15% of all mutual funds purchased last year. Investors, especially senior citizens seeking security, need to understand that the risks of such investments are no less when they are purchased at a bank. The Federal Deposit Insurance Corp. insures (up to $100,000) only savings accounts, checking accounts and certificates of deposit.

The bank customers survey showed that nearly 90% of those who bought mutual fund shares through banks were warned that the risk was theirs if the funds fell in value. Yet almost half still believed the government would cover any losses. Such misunderstanding must be countered aggressively to protect the interests of consumers, banks, mutual funds and the stock market.