If you turn to the Wall Street Journal or major newspapers, you may see a compact series of pages entitled Mutual Funds. This page contains over 8000 fund names, prices, returns, and other key characteristics. Each fund is an investment group in which individuals or legal entities can participate. At the end of 2003, the New York and US stock exchanges held more funds than common stock. Approximately 8,000 of these funds generate more than $ 7.4 billion in assets, which is about 18% of the total financial assets of the US population. At the beginning of 2004, 22% of pension funds were invested in investment funds.
More than 90 million people have access to these accounts, which enable them to invest in the stock market without being money managers. They are professionally run pooled investment vehicles. Mutual funds allow individuals (you, me, and everyone else with money to invest) and institutions (companies, trusts, and pension funds) to combine small sums of money to invest in large amounts. Professionals in investment management will then use this increased amount to:
• investing tactics that would otherwise be impossible to implement (for example, purchasing bonds that are only available in very high denominations);
• gain economies of scale (such as paying low broker commissions) that are impossible to achieve by spending smaller amounts; and
• lowering risk by owning a diversified portfolio of shares.
Mutual funds have a growing share of the nation's capital reserves as a result of these advantages. Mutual funds earned 26% of household financial asset transactions in 2003, indicating that households preferred mutual funds overbank deposits, private securities, or other portfolios. Long-term securities were purchased from these mutual fund purchases. Mutual funds hit their peak percentage of household financial assets at 18% at the end of 2003, up from 10% ten years ago. During these ten years, the securities markets saw a rise in the late 1990s, followed by a downturn in 2001 and 2002. The gross assets accumulated in mutual funds increased from $6.4 trillion to $7.4 trillion in 2003.
Investment returns rather than capital flows accounted for the rise in mutual fund assets in 2003, as cash flows from long-term funds replaced liquidity flows from money market funds. Dividends reinvested by owners of the funds, as well as increases in the value of stocks, shares, and other assets owned by the funds, are examples of investment returns. The mutual fund market is mostly an American phenomenon.
Although mutual funds and related investment instruments exist in other countries, they are nowhere near as common as they are in the United States, despite the fact that in recent years, more global investors have chosen funds as their investment of choice. At the end of 2003, the assets held in mutual funds in the United States constituted 57 percent of the global amount of open-end, pooled investment funds, which totaled nearly $14 trillion. After the United States, France has the second-largest mutual fund market, with funds having more than $1.1 trillion in reserves. While the U.S. industry continues to expand at a rapid pace, raising assets by 34% between 1999 and 2003, worldwide overall net assets increased by 49% over the same five years. During the ten years from 1994 to 2003, the US industry grew by 258 percent, while global overall net assets grew by 236 percent.
The mutual fund industry is a major component of the United States' financial services market, and it attracts significant attention from the United States Congress, federal regulators, and states concerned with protecting the needs of American households and their retirement accounts. At the end of 2003, nearly $2.7 trillion in retirement accounts has been deposited in pension funds, accounting for 22 percent of retirement assets (excluding social security benefits) that Americans would need in the future to finance their retirements.
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