Amid rising concern about a possible market downturn, the Dime Savings Bank is reminding its customers that investing in fixed-income mutual funds can be risky.

In a recent one-page letter to customers who have purchased mutual funds, the New York thrift emphasized that the investments differ in several significant ways from certificates of deposit.

"Mutual funds are not bank deposits, and as such are not insured by the Federal Deposit Insurance Corp. or any other agency of the federal government," Dime said in a letter that was enclosed in quarterly statements.

The letter was signed by John Newman, the thrift's assistant vice president for compliance.

Others Likely to Follow

Issuing such a letter was an unusual step, but more banks and thrifts are likely to follow Dime's lead.

With yields on deposits hovering in the 3% range, bank customers have been flocking to mutual funds, particularly those that invest in bonds.

A rise in interest rates would depress the value of those fixed-income investments, at least in the short-term.

Banks are eager to ward off a potential backlash by reminding investors about the nature of these products.

Regulators, too, increasingly are voicing concern that bank customers, accustomed to the safety of deposit insurance, may be in for a rude awakening if they lose money on investments.

Reacting to Regulators Call

Though Dime decided early this summer to issue the reminders, it was also reacting to a call by regulators for stepped-up communications with investors, according to J. Edward Diamond, president of Dime Securities, the thrift's brokerage unit.

Given all the talk about compliance and disclosure this year, "I think in a subliminal way I decided the time was right for us to do something," he said.

In the letter, Dime emphasized that while mutual funds "generally yield more than bank CDs," they are subject to changes in principal value and yield.

"You should be willing to accept fluctuation in the value of your investments since you seek the potential for higher returns over longer periods of time," the letter said.

The letter explained that funds that invest in U.S. government securities and municipal bonds are not immune to shifts in market value. These funds are among the most popular with bank customers, because they are generally low in risk and volatility.

Plans to Hire More Brokers

In related news, Mr. Diamond said Dime is planning to hire six new brokers, bringing its investment product sales force to 60.

The new hires will help Dime serve its branch clientele more effectively, Mr. Diamond said.

"We're doing well, but we're still not capturing as much of the money going out the door as we could," Mr. Diamond said. Dime wants to hire sales representatives who have insurance licenses and Series 7 licenses that enable them to sell a broad range of securities.

Mr. Diamond would like to add even more brokers to handle demand, but said space limitations at the 34 branches where Dime has brokers prevent this.

Dime's investment representatives offer the mutual funds of Putnam Financial Services, Oppenheimer Management Corp., Franklin Resources, and Kemper Financial Services.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.