As interest rates climb, bank customers' satisfaction with their bond funds will plummet, a mutual fund expert warns.
"They'll stampede out because that's what the risk-averse investor does," said Nick Murray. A former managing director of Bear, Stearns & Co. and author of "Serious Money: The Art of Marketing Mutual Funds," Mr. Murray is now a consultant to the fund industry.
Investors will panic because many don't realize that bond prices fall as interest rates rise, Mr. Murray said in an interview.
A fall in bond prices generally means increased dividend payments, reflecting the higher interest rates of new bonds that are purchased for the fund.
But that will be little consolation when investors are seeing the value of shares decline for the first time, Mr. Murray said. "A whole generation of eager fund buyers is in for a shock."
When rates do rise, customers' reactions will depend on whether bond price fluctuations were explained to them and whether they understood the explanation, Mr. Murray said.
Banks can blunt potential blows by taking immediate steps to shift customers into equity funds, Mr. Murray said. "Start talking to them about diversification."
Mr. Murray sees utility stock funds as "ideal entry-level funds. They represent the least risk of long-term principal."