Market's rise puts brakes on exodus from fund groups.

THE mutual-fund scandals have revived an old stereotype of fund investors as little lost lambs. If these benighted souls understood the misdeeds revealed over the past couple of months, the intelligentsia declares, they'd be cashing out in droves.

That great horde of democratic capitalists, 95 million strong, still might do something like that. The news on the fund business the past couple of months has been shocking enough to give anybody pause.

In specific fund groups where the investigations have drawn blood, such as the Putnam funds, investors have shown their patience is not limitless. So far, though, investors haven't fled funds in general. Their reasons for sticking around may be savvier than the wise guys recognize.

Most fund investors think long-term, which puts them at odds with Wall Street's trading culture. Investment Company Institute surveys show that three-quarters of fund investors make no changes in their holdings via redemptions in a given year. So if the average statistical redemption rate has been rising, the trade group says, "a small number of shareholders can and likely do generate a disproportionate percentage of the total redemptions."

Thanks to the scandals, we now have an anecdotal portrait of those frequent traders. They include hedge funds, international market arbitragers and, sigh, even some managers of the mutual funds themselves looking to skim a fast buck.

The great majority of investors, meanwhile, stick to long-term habits, resisting rash action while watching and waiting to gauge where their best interests lie. After all, the cost to an investor of dumping funds indiscriminately may be onerous, including taxes and transaction fees--not to mention disruption of a carefully considered investment plan.

Meanwhile, the stock market has been rising, not falling, as the fund scandal has unfolded. A discerning investor is quite capable of simultaneously deploring the state of financial behavior and holding a bullish view of the stock-market outlook.

According to the latest survey of affluent Americans by U.S. Trust Co. of New York, "'the nation's wealthiest citizens are significantly more worried about a broad spectrum of economic and financial issues than they were last year." But the affluent also project annualized returns for the stock market of 8 percent over the next year and 10 percent over the next three to 10 years.

What's good enough for the aristocracy apparently also works for the bourgeoisie, as represented by fund investors. Any time fund owners react to unsettling events by selling, they are dismissed as too easily spooked to qualify as serious investors. If they don't sell, that proves they don't understand a genuine threat to their well being.

A better model gives fund investors more credit. No, they are not foolish enough to be driven to mindless selling, but that does not mean they are ignoring the scandals. More likely, they are watching closely, expecting to see material improvements made in fund governance, fund regulation and fund ethics.

And what if changes don't come through? The fact that investors haven't yet turned their back on mutual funds carries no promise they won't someday change their minds.

Chet Currier is a columnist for Bloomberg News.