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Funds put the brake on "market timers'

Investors have resumed their push into stock mutual funds, but at many fund companies, they will find it is easier to get in than it is to get out.

To discourage a mass exodus by mutual-fund investors during market turmoil, many firms are cracking down on investors who make a lot of telephone "exchanges," switching money from one fund to another by calling an 800 line.

Ultimately, investors who run for the exit with every stock-market blip may soon be forgiven for thinking that the toll-free phone number at their fund company is 1-800-U-R-STUCK.

The policies are being developed in reaction to investors who try to take advantage of a market plunge like last week's 554-point drop in the Dow Jones Industrial Average. Stocks have since rebounded, with the Dow closing Wednesday at 7,692.57, only 23 points from where it was before the big drop. Mutual fund inflows also have rebounded.

U.S. stock funds tracked by the newsletter Mutual Fund Trim Tabs took in a net $451-million last Friday and Monday, breaking a string of three straight negative Friday-Monday periods, during which they had dropped a total of $1.57-billion.

During a big drop, funds can temporarily ban phone exchanges or severely restrict them. Such a delay would be an obvious frustration to bargain hunters, also known as "market timers."

One of the latest to crack down is Dreyfus Corp., the big fund firm with nearly $95-billion in assets. Just days after last week's harrowing stock market drop and breathtaking rebound, Dreyfus announced what it calls a "stock-market correction trading activity" policy. The unusual policy, which takes effect Jan. 15, gives Dreyfus the leeway to take an additional day to complete a telephone exchange, rather than execute the switch in a single day, as is usual at most fund groups.

During what Dreyfus deems to be a severe market correction, the firm will be able to treat an exchange as if it were two separate requests _ first a sale, then a purchase of a fund. If a given fund doesn't have enough cash on hand to pay departing investors, it can force an investor to wait an extra day before completing the purchase of another fund.

The problem: All but a tiny number of mutual funds calculate a share price once daily, after the markets close. So an investor could be forced to wait as many as 30 hours before the second, or "buy," part of a fund switch is complete. By then, the stock market _ and mutual-fund share prices _ may have either fully recovered or slipped significantly lower.

Steven Newman, a lawyer for Dreyfus in New York, said the policy is part of a "market volatility" contingency plan that had been in the works for months. He said the plan could be implemented if "circuit breakers" at the New York Stock Exchange shut down trading, preventing a stock fund from selling securities to raise cash.

Dreyfus isn't the only mutual fund company looking to take the wind out of the sails of investors who blow in and out of funds. Many big fund groups stipulate in legal filings that their funds can restrict any trading that smacks of market timing.

_ Information from Dow Jones News Service was used in this report.

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