A mutual fund that invests in utilities snared the top spot in the performance race among bank-managed equity funds in the third quarter.

This result is likely to create more demand for utility funds, which appeal to many investors when stock prices zigzag and interest rates are low.

"I'd suspect that next year, if the economy slows and earnings are weak, you could see another period where they might do well," said Jay Evans, a portfolio manager at Fleet Financial Group's investment management arm.

Mr. Evans oversees the banking company's utility fund, which posted a 4.57% return in the third quarter to lead all bank-run equity funds. (Third-quarter performance tables from CDA/Wiesenberger begin on page 11.)

Utility funds, which tend to produce steady but unspectacular returns, are sought by conservative investors who like their dividend stream and the fact that their share prices may rise if stocks go up.

Today's low short-term interest rates have made utility funds an attractive alternative to short-term bonds. The Federal Reserve's decision Tuesday to reduce the federal funds rate by a quarter-point, to 4.75%, should boost utility funds, said Geoffrey Bobroff, a mutual fund consultant in East Greenwich, R.I.

"They tend to act very favorably with interest rate declines," he said.

The increased demand for the funds in turn drives up the share prices.

Another attractive feature is their low capital gains tax. There is virtually none, since the stocks in the portfolio rarely turn over.

Utility funds gained popularity at the beginning of the decade, another period of low rates. Since then, the funds have multiplied: There are now 104 of them, compared with 28 at the end of 1990, according to CDA/Wiesenberger, Rockville, Md.

Assets in utility funds have risen to about $23 billion, from $7 billion in 1990, according to CDA/Wiesenberger.

No bank-run utility fund existed eight years ago. In August 1993 there was one, with $30 million of assets under management. There are now five, with about $200 million of assets.

Traditionally considered staid and even boring investment products, utility funds could become more interesting with deregulation of the industry, Mr. Bobroff said.

Companies across the nation are splitting themselves into power generators and power distributors, and it remains to be seen whether the spun-off companies will prove more or less volatile as investments.

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