Mortgage-backed securities have lost some of their luster with a key group: investors in mutual funds.

For a second straight year, funds made up of mortgage securities saw net outflows in 1995, while the mutual fund industry as a whole reported increases.

Investors pulled $5.3 billion from mortgage funds last year, leaving such funds with $55.2 billion of assets at yearend.

The decline, although significant, was less than one-third of the $17.7 billion that investors withdrew in 1994.

While most mortgage funds adjusted to the departing investors, other portfolios simply packed it in. The number of funds that invest solely in mortgage securities slid to 88 in 1995, from 95 the year before.

The declines ended years of growth for mortgage-backed mutual funds, which topped $73 billion of assets in 1993 and were widely expected to continue amassing assets.

Mutual funds "were quite important" as investors in the early 1990s, said a money manager who was active at that time.

Still, no one says that the loss of mortgage fund investors will undermine the market for mortgage securities.

Total-rate-of-return investors, like money managers and insurance companies, are picking up some of the slack, said Rajiv Sobti, managing director at Donaldson, Lufkin & Jenrette, New York.

The Federal National Mortgage Association, or Fannie Mae, and Federal Home Loan Mortgage Corp. have also been relying on mortgage-backed securities to bulk up their portfolios.

These government-sponsored agencies "have been solid as a rock," Mr. Sobti said. "They've obviously been picking up some of the excess."

Mortgage fund managers are perplexed by the runoff, saying that certain mortgage securities are some of the safest investments.

"It's kind of strange to me why we've had an outflow," said Garitt Kono, senior portfolio manager at Dreyfus Corp., the New York money management firm.

Mr. Kono oversees three funds consisting of mortgage securities, products that he said supply steady principal and interest payments, making them ideal for older people.

The funds have also been performing well, he said.

For instance, the Dreyfus Ginnie Mae fund was up 14% last year. But its assets are about even from where they were at the beginning of 1995 because of outflows.

Mr. Kono and others suggested the stock market has had an impact, saying its 20% and 30% returns over the past two years make it more attractive than the bond market.

"You've got to look at the strength of equities," Mr. Kono said.

As a result, mortgage portfolios may take more hits. "It all depends on the stock market and the absolute yield levels of fixed-income securities," he said. "If the stock market continues to rally, I believe you will see outflows."

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Fannie Mae, one of the largest creators of mortgage-backed securities, issued $11.8 billion of the products in February, according to the most recent data available.

This volume slightly exceeded January's activity, when Fannie Mae issued $11.5 billion of the securities.

The agency also reported that outstanding mortgage-backed securities grew by $5 billion in February, to $592.7 billion.

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