91-day savings-account challenge tossed before the money funds

When a new financial challenger steps into the ring with money market mutual funds May 1, it will face a cocky champ.

Beginning that day, banks and savings-and-loans will be able to offer a 91 -day savings certificate with a yield pegged to Treasury bill rates. Approved by government regulators in March, the challenger is designed to land some body blows on the current champ at attracting depositor dollars - the money funds.

Federal Reserve chairman Paul Volcker, among others, questions whether the challenger is strong enough to compete with the money funds. But the new instrument seems a herald of the inevitable de-regulation of banks and S&Ls. As these traditional depository institutions offer more intriguing products, what will happen to money market and equity mutual funds? Will they remain popular, or will they suddenly find themselves behind the times, the financial equivalent of worn-out fighters?

''It depends on the extent of deregulation,'' says James Riepe, vice-president of T.Rowe Price's mutual funds division. ''I would suggest the funds will do very well.''

Banks and S&Ls have long complained their cash is being unfairly drained by money funds, current darlings of the mutual fund industry -- or, as a recent American Bankers Association ad subtly puts it, ''a ravenous new breed of less-regulated competitors.''

Various proposals to deregulate depository institutions are floating around Washington. A far-reaching bill introduced by Sen. Jake Garn (R) of Utah would, among other things, allow banks and S&Ls to offer their own mutual funds. A Treasury proposal, apparently fading in appeal, would have allowed the same thing -- though only through separate subsidiaries. On Feb. 25 the Federal Home Loan Bank Board put out for public comment a proposed rule giving thrifts vast new powers, including money market funds, if the products are offered through service corporations.

That's one way to become fashionable -- offer the same thing your opponent does. But mutual fund officials say their thin-margin business isn't what the troubled banks and thrifts need.

''You can't use the money'' for loans, says Matthew Fink, chief counsel for the Investment Company Institute. ''All you get is a fee. Citibank, even if they had a huge mutual fund, they'd never see it on the bottom line.''

''This business gets more difficult to jump into every day,'' says Frank Parrish, vice-president of Fidelity Management. How much are they willing to spend to develop the computer programs and phone lines? We get 10,000 phone calls a day.''

Mr. Parrish adds, however, that ''all of the big (banks and thrifts), anyway, would have to have their own money market funds.''

Bank and thrift trade association officials say obtaining mutual fund powers isn't their highest priority. Not that they'd turn it down if offered; but thrifts would prefer mortgage subsidies, and banks want their interest rate ceilings raised.

''Having a competitive depository instrument is more important than the power to offer mutual funds alone,'' says Fritz Elmendorf, a spokesman for the American Bankers Association, though he adds that ''when the stock market eventually rejuvenates, equity mutual funds might be a key product.''

The new 91-day, $7,500 minimum certificate, approved by the Depository Institutions Deregulation Committee March 22, is not the competitive instrument the ABA asked for. It had proposed a $5,000 minimum account, with no interest rate ceiling.

But S&Ls, whose cash flow problems are more acute, wanted something a bit less drastic. So Treasury Secretary Donald Regan, chairman of the committee, pushed through the 91-day account -- calling it a ''plain vanilla'' instrument that might later be jazzed up to make it more competitive.

In general, money fund officials claim the new account shouldn't be too hard to compete against.

Banks and S&Ls ''haven't been able to get over that hurdle of easy entry and exit,'' says Frank Parrish of Fidelity. ''People have an innate fear of tying their money up.''

An institution-offered money fund would be a more formidable foe. ''There's no question they would get a lot of business, because of their close ties to customers,'' Parrish says.

Most money fund managers aren't concerned about losing any of their current cash. The marketing clout of banks and S&Ls would increase the total amount of money in money funds, they say. Independent funds would have a smaller share of the market -- but the market pie would be much bigger.

''The more that people know about money funds, the better,'' claims James Riepe of T.Rowe Price.

As for stock-oriented mutual funds, competition would center on whether small funds are better market-readers than large institutions.

''The only thing you can do is try and outperform those guys,'' says Stephen Barney of Twentieth Century funds. ''A lot of equity mutuals are closely held by the decisionmakers. Their ultimate strength is, they are entrepreneurial.''

''(Equity) mutual funds have historically outperformed all other investment advisers'' in picking stocks, says Mr. Riepe. ''That would be the area of competition I would least worry about.''