Mutual Fund Proliferation Too Much of Good Thing? : Investing: Some observers see danger in near tenfold increase since early ‘80s. Others say expansion was needed, and funds remain safe.

Although they advertise with images of lions, bulls and rams, there’s a suspicion that mutual funds actually are members of the rabbit family.

The inference arises naturally from the rate at which they have multiplied. At the beginning of the 1980s, there were just over 500 funds that belonged to the industry trade group, the Investment Company Institute. Today there are almost 5,000.

To some observers, in fact, this proliferation is not just a sign of booming growth and prosperity but a symptom of dangerous excess.

Even if you don’t share that sort of pessimism, it’s easy to wonder whether there aren’t too many funds these days, leading at the very least to confusion for the customer.

To even casual students of economics, it certainly looks like a familiar pattern--a prosperous business expanding its capacity to a point where customer demand can’t possibly keep up.

But some prominent industry analysts dispute these conclusions. “Most critiques of the addition of fund-industry capacity glide past two major points,” says John Rekenthaler, editor of the Morningstar Mutual Funds service.

“First, those who made similar arguments about the industry’s growth a decade ago were dead wrong.

“Second, many new funds do not in any real way represent new capacity. They are instead just the repackaging of existing monies or the splitting of one portfolio into a host of separate but essentially similar funds.”

Adds Sheldon Jacobs in his newsletter, The No-Load Fund Advisor: “How many are necessary? Well, how many different automobile models are necessary? Necessary is irrelevant.

“The tremendous increase in the number of funds has been propelled by investor demand and by the need for fund groups to each offer a complete array of funds. Today, all large fund groups and many medium-sized groups can provide you with a complete selection of stock, bond and money funds. That’s good for them, and adds convenience for you.”

Analysts like these concede that a prolonged rush of money into any investment arena is a time-honored warning of trouble.

To a great extent, Rekenthaler says, the expansion in the number of funds makes good business sense. “There weren’t enough funds existing a decade ago,” he says. “The industry wasn’t large enough to handle its flood of new assets.

“Many large, established fund companies had incomplete product lines--lacking, perhaps, international stock funds or an established municipal bond department.”

When bear markets inevitably occur in one type of security or another, the optimists point out that the fund industry’s diversification can serve as a stabilizing force. Thus, when things go badly for bonds, as they have in the past year, assets may not leave the fund industry altogether but flow instead into stock or money-market funds.

That leaves the question of whether funds as a format for all types of money management will retain the confidence of investors.

Jacobs says: “Any industry this size has some warts, and the mutual fund industry is no exception.”