Do mutual funds make sense for bank portfolios? Sometimes. Do they fit all portfolios? Probably not. How do you determine the potential value and risks? History helps.

First, a look at some federal regulatory requirements concerning funds for bank portfolios (state regulations will vary):

* The OCC and the FDIC allow unlimited purchases of shares of investment companies (mutual funds) as long as the funds are invested solely in obligations eligible for purchase without limitation by national banks.

* Mutual funds must be assigned the capital risk weight applicable to the highest risk-weighted asset the fund is permitted to hold, but never less than 20 percent.

* Mutual funds qualify as liquid assets if the funds are limited to assets that qualify for liquidity, and this limitation can only be changed by a vote of the mutual fund shareholders.

* Mutual funds are to be "available for sale" under Financial Accounting Standard 115. Unrealized gains and losses are excluded from earnings but are reported as adjustments to capital.

* Gains and losses on the sale of mutual funds are reported as capital gains or losses for tax purposes. Capital losses must be offset by capital gains; e.g., gains on the sale of equipment or property. The typical community bank does not have capital gains so capital losses are usually not tax deductible.

If you are still reading at this point, you own mutual funds, you have considered buying mutual funds, or you are really bored with whatever else there is to do.

THE DISADVANTAGES

Mutual funds carry sales loads as low as 0 percent and as high as 5 percent with annual management fees ranging from .25 percent to more than 1 percent. Mutual funds can sell off principal, reducing the NAV (net asset value), return this to investors as taxable dividends and include this principle reduction as taxable yield.

NAV is reported at the other side of the market. Large withdrawals can cause a sell-off at the bid side of the market. Differences between the bid and the offer on those securities sold must be deducted from the NAV of the remaining securities.

THE ADVANTAGES

Is there any good news? Certainly, or there wouldn't be $2 trillion of this stuff out there. Among the advantages:

* automatic diversification;

* professional portfolio management;

* daily, observable results.

Mutual funds are typically managed by very bright people using sophisticated analytical techniques. They diversify their risks, they watch market movements carefully, and they are truly interested in earning as much money for their fund as possible. After all, nothing sells a mutual fund better than success. …