U.S. Mutual Fund Industry

Mutual funds have become a boom market in the United States, a shift that has puzzled some and that many question as to its potential longevity. The boom in mutual funds has had a number of consequences for the economy and for the way individuals save and spend their money. The boom in the mutual fund market came after a period when its demise was predicted, so the change is something of a revival of what was then viewed as a less-valuable financial instrument. This revival has not been entirely welcome, however, and it has raised numerous concerns that the boom will not last and that when it bursts it will be very damaging to a lot of people who have come to rely on mutual funds for their investments and for their future.

The U.S. mutual fund industry started in the late 1920s and grew steadily during the decades after World War II. However, until recently the assets in mutual funds remained relatively modest compared to the banking system. In 1960, for instance, equity funds showed assets of $11.9 billion and bond funds showed assets of $5.1 billion. There were not yet any money market funds at that time. The bull market in the 1960s increased the equity assets of the industry to $38.5 billion, while bond funds increased to $9.1 billion during the same period. During the 1970s, assets grew very little because of the severe bear market resulting from high inflation in the middle years of the decade. When money market funds were introduced, however, the period fro

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the funds from the beginning, for they were supposed to offer a simpler way of investing than having the investor doing all the scouting for him or herself. The irony is that choosing a mutual fund has become extremely complicated, as today there are more than 5,000 mutual funds being marketed as fund companies and magazines covering the funds vie for public attention. This fact has directly tied the fortunes of the middle class to all the profits and the perils of a volatile market (Nocera, 1994, 29-30). The growth in mutual funds contributed to the decade-long bull market in financial assets that helped produce it in the first place. Fund assets have increased twelvefold. This increase has been aided by increasingly slick advertising by a widening group of sellers. Mutual funds provide an easy way for investors to acquire and trade a diversified portfolio of securities. Investors have not only switched from buying securities directly to buying them through mutual funds, but they have also bought more securities than they would have otherwise, thus pushing their prices even higher. After the stock market crash in 1987, investors bought even more bonds than equity funds and fewer of both, for a while, than before the

Category: Economics - U