A year of volatile markets and leaden sales has taken some of the spunk out of the bank mutual fund business.

After a banner year for mutual fund sales in 1993, banks saw volume drop sharply in 1994, executives said in a round of interviews last week. And while the turn of events hasn't soured bankers on the funds, it has reminded them that investment products are a decidedly cyclical business.

"The easy days of '92 and '93 are behind us, perhaps for another generation," lamented Joseph Cooney, president of the brokerage subsidiary of First Security Corp.

The Salt Lake City banking company's mutual fund volume dropped 45% from December 1993 to November 1994. And though sales of fixed annuities helped soften the blow, Mr. Cooney expects 1995 "to be another tough year for bank programs."

Such pessimism stands in stark contrast to the heady days of late 1993, when bankers were still reveling in their new role as mutual fund powerhouses. They were launching funds left and right, and sales were brisk. Mellon Bank Corp. even cut a stunning deal to buy Dreyfus Corp., the nation's sixth-largest mutual fund company.

But in February 1994, the Fed began its tightening moves, raising interest rates and sending the markets reeling.

Certainly, mutual funds have been feeling the effects for months. The Investment Company Institute reported last week that $2.6 billion flowed out of mutual funds in November, after a weak $3.2 billion inflow in October. In November 1993, by contrast, mutual funds took in $16.3 billion of fresh investments.

Bond mutual funds - a favorite investment of bank customers - have been especially hard hit, with a $7.1 billion runoff in November, following a $4.7 billion drain in October. These funds are vulnerable to such outflows because they decline in value when interest rates rise.

Mutual fund sales through banks in 1994 probably dropped 25% to 50% from 1993's level of about $54 billion, though solid numbers are not yet available, said Kurt Cerulli, principal of Cerulli Associates, a Boston consulting firm.

To be sure, banks have made up some of their lost mutual fund volume. Bankers contacted last week said sales of short-term instruments that benefited from the rate hikes - such as money market funds and U.S. Treasury instruments - are up strongly.

But these investments, with typical commissions of less than 1%, are decidedly less lucrative than mutual funds, which carry fees of 2% to 4%.

At Minneapolis-based Norwest Corp., for instance, demand for individual bonds is way up - but so is competition. So the company's brokerage unit, Norwest Investment Services Inc., is selling the bonds at cut-rate prices, slashing into profits.

"The way I look at it, we're having a fire sale right now," said John S. McCune, the unit's chief executive.

That sentiment was echoed by a broker at a community bank in Illinois, who did not want her name used. She noted that while mutual fund sales fees are fixed by the prospectus, bond commissions are negotiable. "An ambitious investor can shop around and find the lowest price," the broker said.

But another market source said there is a definite upside to bond sales: "You don't make as much on Treasuries, but you make more of them," said Kevin Kelly, a trader at BHC Securities, Philadelphia.

What's more, Mr. Kelly said, the investments appeal to customers because they are "more tradable than mutual funds."

Some industry experts say, however, that it would be a mistake for banks to lower their expectations for mutual funds.

Geoffrey H. Bobroff, principal of Bobroff Consulting, East Greenwich, R.I., says he expects interest rates to peak early next year. If that happens, the second half of 1995 "should be quite good for mutual funds."

Mr. McCune of Norwest concurred, adding: "If we can get the Fed out of our hair, then I think we'll have a good year in 1995."

Indeed, some banks are already preparing for brighter days.

Amcore Financial Inc. is increasing its investment products sales force from five to 52 employees this week, said Diane L. Peters, mutual fund coordinator for the Rockford, Ill., banking company. Its fund sales totaled $350 million in November, up a respectable 3% from a year earlier.

And some banks are completely defying the trends.

Ronald Szejner, chief executive of the brokerage arm of First Michigan Bancorp in Holland, Mich., said November and December's fund sales were 25% above September and October's levels.

He says much of the activity is tax related, with another chunk coming from investors who hope that the new Republican-controlled Congress will stabilize the economy.

"There are still a lot of dollars out there that are just waiting for the right moment to be invested," Mr. Szejner said.

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