Investors are putting less money into mutual funds, and the fund industry is straining to put a happy face on the situation.

Few speakers and attendees at the Investment Company Institute's annual conference here last week came right out with their worries about the drop in inflows. Some industry executives detected a whiff of denial in the air.

"When you talk to the competitors, they're all doing great," said Jeremiah Potts, the head of marketing at Massachusetts Financial Services. "But the numbers are the numbers."

Speakers at the conference, which ran Wednesday through Friday, avoided the unpleasant subject. Between sessions, most of those attending painted bright pictures of their businesses for each other and for the dozens of reporters present.

But investors put in $42 billion more than they took out of mutual funds in the first quarter-less than half the net inflow a year earlier, according to Financial Research Corp. of Boston. The business implications of this reversal were on the minds of some executives.

"Redemptions in this industry are an issue," said Richard Monaghan, the head of distribution for Putnam Investments. "Everyone is wrestling to try to get their arms around it."

Some fund company executives said the decline in net asset flows may be a short-term phenomenon.

"I'm not sure this isn't any more than a cycle," said William N. Shiebler, the former head of distribution for Putnam who is consulting for the company and preparing to retire.

Part of the money that was going into mutual funds seems to be going into individual stock purchases through on-line brokerages, a trend that has some industry watchers concerned.

"The stock market has created an illusion that you can do it on your own," said Avi Nachmany, a consultant at Strategic Insight in New York. "You can talk to 100 people and conclude that 99 of them have no clue what they're talking about."

Peter S. Lynch, vice chairman of Fidelity Management and Research Co., spoke about the perils of on-line day trading in his keynote address to 2,200 people.

"You would get the same results in a casino," Mr. Lynch said, "and this has a lot more paperwork."

Earlier in the day Robert C. Pozen, chairman of Fidelity Management and Research, told reporters he is concerned that the stock market is being propelled by a small number of stocks.

"How good is it if the market is being driven by 30 or 40 stocks?" he asked.

If those stocks cool off enough to cause a flat or declining market, said people at the conference, profits in the mutual fund business could erode-and that could lead to consolidation.

Merger activity in the asset management business has been relatively light, in part because of high prices, Mr. Shiebler said.

"The prices on money managers are very high," he said. "A flat market will bring them down."

Another reason for the scarcity of acquisitions recently is the fact that "big capable buyers" such as banks have been busy buying other banks and brokerages, Mr. Shiebler said.

Scott N. Degerberg, vice president of Fifth Third Bancorp, agreed that merger deals could be around the corner.

"The trend's still there," Mr. Degerberg said. "People in the asset management business are always looking to make acquisitions where it makes sense."

The growing importance of electronic commerce promises to shake up the mutual fund industry, people at the conference said.

And though investors are likely to turn more to the Internet to buy, redeem, and exchange mutual fund shares, executives of fund companies that sell through brokers said they are confident that the middleman approach will remain successful.

"We really, fundamentally believe there will be a role for advisers," Mr. Potts of Massachusetts Financial said.

Mr. Monaghan of Putnam said his company is concentrating on improving its on-line services to brokers rather than to customers.

"Our focus remains on the importance of advice," he said.

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