Mutual Funds(c) Your Money, Your Choice... Take Control Now and Build Wealth Wisely 2002

Chapter 4. Mutual Funds Are Popular!

U.S. households own numerous financial assets. They invested some $271 billion net in 2000 in financial assets, although this amount was down sharply from the $476 billion invested in 1999. On balance, households were net sellers of stocks and bonds held directly. However, they were net buyers of mutual funds.

Mutual funds are the quintessential asset for U.S. investors. In 1990, households owned 76 percent of all mutual fund assets. By 2000 they accounted for 80 percent of all mutual fund assets, and total mutual fund assets at that time totaled $7 trillion. ^[1]

^[1] At the end of 2000, financial, business, and other organizations owned about 11 percent of mutual fund assets, and fiduciaries owned about 10 percent. Thus, households owned about 80 percent of all mutual fund assets.

Perhaps they are reassured by statements such as that made to a mutual fund industry gathering by Arthur Levitt when he was chairman of SEC and a well-known advocate for the rights and protection of individual investors: "You have earned the confidence of the American public ”and you've done so without the safety net of federal insurance to protect investors from mistakes." ^[2]

^[2] This quote comes from Weiner Renberg, "Second-Class," Mutual Funds section, Barron's Online , July 9, 2001. Barron's Online can be accessed at The Wall Street Journal Web site, www.wsj.com.

Consider the following indicators of the popularity of mutual funds in the United States:

• Over the three-year period ending in July 2001, investors had poured some $577 billion into stock mutual funds alone.

• An estimated 93 million individuals (in 55 million households) own about 80 percent of all mutual fund assets.

• By year end 2001, 52 percent U.S. of households owned mutual funds. In 1980, slightly less than six percent of U.S. households owned mutual funds. This alone is a strong indicator of the popularity of funds.

• As of year end 2001, assets approximated $6.97 trillion. The assets of mutual funds exploded in the 1990s, as new money flowed in and the financial markets performed very strongly. In 1990, total assets were slightly over $1 trillion. Thus, in one decade , assets of mutual funds grew sevenfold, starting with a base of $1 trillion. Clearly, mutual funds have increased significantly in importance as a financial asset in recent years . In fact, mutual funds are now the largest financial intermediary in the United States!

• As of December 2001 there were 8,321 mutual funds in the United States, ^[3] broken down among types of funds as shown in Table 4-1.

  ^[3] As reported by the ICI, the industry organization representing investment companies.

• Of households owning stocks, 85 percent held a portion of their stocks through mutual funds in 1999. In 1992, the corresponding number was 50 percent. Think about this statistic: It proves that most households that do own stocks do so, at least partially, through mutual funds. Therefore, most equity-holding households should be interested in the advantages and disadvantages of mutual funds. If there are problems, they should want to know about them.

  Table 4-1. Types of Mutual Funds

  Type of Fund	Number
  Stock funds	4,730
  Hybrid funds	484
  Taxable bond funds	1,278
  Municipal bond funds	813
  Taxable money market funds	690
  Tax-free money market funds	326

• By the end of 2000, one third of household equity (stock) assets were held in mutual funds, up from 11 percent in 1990.

• At the end of 2000, about one fourth of U.S. households owned money market funds and held roughly the same percentage of their short- term assets in this form.

How important are mutual funds to the individuals' retirement plans? Mutual funds have expanded their role in private pension systems as defined contribution retirement plans grew in popularity in the 1990s. Consider the following statistics:

1. As Figure 4-1 shows, of the total U.S. retirement market at year end 2000, totaling $12.3 trillion in assets, mutual funds constituted about $2.5 trillion, or 20 percent. The remaining 80 percent was held by pension funds, insurance companies, banks, and brokerages. ^[4]

   ^[4] The source for Figure 4-1, constructed by the author, is Federal Reserve data.

   Figure 4-1. Approximate Percentage of Retirement Assets Held by Mutual Funds versus Pension Funds, Banks, and Brokerages, 2000.

2. As Figure 4-2 shows, retirement accounts hold approximately one third of all mutual fund assets. Thus, mutual funds play a large role in the retirement plans of many people. ^[5]

   ^[5] The source for Figure 4-2, constructed by the author, is ICI and Federal Reserve data.

   Figure 4-2. Percentage of Mutual Fund Assets Held in Retirement Accounts, 2000.

It is clear from these data that many individual investors are vitally affected by the pros and cons of mutual funds. Individuals are going to invest, and when this investing takes place indirectly, the likelihood is that mutual funds are involved. We can also talk about direct investing involving mutual funds. An individual can buy and sell both individual stocks and mutual funds in their own brokerage account.

In many respects, mutual funds are the people's everyday asset, one that is widely owned and provides the basis for much of individual investors' future wealth enhancement. This is why a critical evaluation of mutual funds is so important.

As noted earlier, the situation is slowly starting to change. The first cracks in the dam have appeared, as some investors have discovered problems with funds that they did not recognize before. Coinciding with this small but viable unhappiness with funds is the emergence of alternatives that investors can turn to in place of funds.

Now more than ever, investors need to review their situations and evaluate their alternatives. Realistically, however, the popularity of mutual funds is not likely to change dramatically in the short run. Investors have too much money in them, funds have been around for a long time, investors are comfortable with them, and funds have served many investors well for many years. It simply would be misleading to argue that all of this is suddenly going to change, and investors are going to shift large amounts of money to some other alternative.