By EDWARD WYATT

Published: July 17, 1996

Mutual fund investors, shocked by a turnaround in stock prices so sharp and so sudden that in some cases it erased a year’s worth of gains in a few weeks, have pulled money out of stock funds at several of the country’s biggest mutual fund companies the last two days.

For now, most of the investors appear to be headed for the safer haven of money market funds, rather than cashing out of mutual funds entirely and stashing their money back in the bank or the mattress. While that will make it easier for fund investors to move back into stock funds once a roily market calms down, some investors clearly have been spooked by the raging volatility.

Fidelity Investments and the Vanguard Group, the country’s two biggest mutual fund companies, each reported modest net redemptions the last two days, as did several smaller sellers of mutual funds, including Janus, Montgomery Asset Management and Charles Schwab’s mutual fund marketplace.

In addition, several fund companies reported that phone calls from investors were coming in at a higher-than-average rate. In Valley Forge, Pa. the Vanguard Group put on alert a portion of the Swiss Army, an emergency crew of Vanguard employees trained to handle the phones in response to market emergencies.

While two days of net redemptions represent only a small portion of the tide of cash that has flooded into the stock market this year, the reversal in course calls into question the theory that the fund industry has promoted over and over: that fund investors do not panic but instead view market selloffs as buying opportunities.

At Fidelity Investments’ office in Rockefeller Center yesterday, Jonathan Lee, a shipping clerk in Manhattan, did not view it as such. Since making his first-ever mutual fund investment in mid-May, buying shares in the Fidelity Growth Company fund, Mr. Lee has lost about 10 percent of his money. And by early afternoon yesterday, when stock prices had fallen even more, he said, I still have a little bit of confidence, but I’ll be very careful before I put any more money into mutual funds.

Mr. Lee added: This was my first experience. I should get more familiar with them before I buy any more.

The fact that Mr. Lee and thousands of investors like him were not rushing to sell was comforting to some mutual fund executives.

Redemptions are up slightly, but nothing that would make my eyes water, said R. Stephen Doyle, chairman and chief executive of Montgomery Asset Management in San Francisco. We’re getting many more calls from people simply inquiring what to do now.

Mr. Doyle added that the redemptions should not be a surprise. Just as many innovations in the industry have made it easier for investors to get into funds, he said, they have also lowered the barriers to exiting.

Investment advisers in particular may be more quick to do something immediately, Mr. Doyle said. They are getting paid a fee to tell you what to do with your money. If they had you invest money in a growth fund and you were up 15 percent a few weeks ago and now you’re down 7 percent, you’d probably wonder what you’re paying for.

The fund companies that worry most about that possibility are those, like Montgomery, that sell a good portion of their fund shares through investment advisers who use mutual fund supermarkets, like the one operated by Schwab, to trade in and out of funds. Mr. Doyle said about 30 percent of his company’s net inflows came through those channels.

But many of the companies that make their sales directly to investors also suffered redemptions this week. Vanguard had a modest level of outflows from stock funds, with most of the money being exchanged into money market funds, said John S. Woerth, a spokesman.

At Fidelity, we did see a pickup today in equity fund redemptions, Robyn S. Tice, a spokeswoman, said. For investors switching out of stocks, money markets were the fund choice, she said, and calls came into the company’s telephone banks at about 30 percent above normal rates.

And in Denver, Janus Funds had net redemptions in all its equity funds the last two days, with most investors moving stock investments into money market or bond funds, Lorrie Weiser, a spokeswoman, said.

So far, the net outflows have not reached levels that would force managers to liquidate holdings to cash out fleeing investors. And at least the selling by fund shareholders has been balanced by net inflows into the stock market elsewhere, including at Charles Schwab & Company’s giant discount stock brokerage.

At Schwab, investors withdrew a net $198 million from mutual funds in the first half of July, through Monday, while making $550 million in net purchases of equities in the same period, according to Tracey Gordon, a spokeswoman.

But many fund investors appear sanguine so far, in part because they have not yet lost substantial amounts. Mr. Lee, the Fidelity investor, for example, even though he was unhappy with the performance of his venture into mutual fund investing, left Fidelity’s midtown office yesterday with an armful of sales brochures for asset allocation and retirement planning.

In the last 12 months, the amount of money invested in domestic equity funds, which primarily buy stocks of American companies, has grown by nearly 30 percent, to $1.3 trillion. On a weighted average basis, that money was invested at about 618-level on the Standard & Poor’s 500 index.

That would mean that on average investors who bought stock mutual funds the last year are about even.

The average masks some harsh realities, however.

Take the Oberweis Emerging Growth fund, which in the year ended June 30 posted a gain of 37.7 percent. But after the reversal in small-cap stocks, the gain for the 12 months ended yesterday fell to 4.8 percent.

That type of reversal could easily cause some investors to question how long they want to stick around.

Other funds experienced even harsher reversals. The Twentieth Century Giftrust fund, which in the year ended June 30 was up 23 percent, was down 10.4 percent in the 52 weeks ended yesterday.

Some investors still see future buying opportunities. At Fidelity’s midtown office yesterday, Sue Pelkofer of Manhattan left with an armful of fund prospectuses. I have one really small individial retirement account invested in mutual funds, she said. But the current market downturn doesn’t scare me, because I don’t think I’ll be getting out anytime soon, she added. I won’t retire for 20 or 30 years. I think it will come back by then.