Mutual Funds /factbook_toc.html

The Mutual Fund Fact Book published by Investment Company Institute includes information about the mutual funds industry's history, regulation, taxation, and shareholders.

Mutual funds are financial intermediaries that pool the resources of many small investors by selling them shares and using the proceeds to buy securities. Through the asset transformation process of issuing shares in small denominations and buying large blocks of securities, mutual funds can take advantage of volume discounts on brokerage commissions and purchase diversified holdings (portfolios) of securities. Mutual funds allow the small investor to obtain the benefits of lower transaction costs in purchasing securities and to take advantage of the reduction of risk by diversifying the portfolio of securities held. Many mutual funds are run by brokerage firms, but others are run by banks or independent investment advisers such as Fidelity or Vanguard.

Mutual funds have seen a large increase in their market share since 1980 (see Table 1), due primarily to the then-booming stock market. Another source of growth has been mutual funds that specialize in debt instruments, which first appeared in the 1970s. Before 1970, mutual funds invested almost solely in common stocks. Funds that purchase common stocks may specialize even further and invest solely in foreign securities or in specialized industries, such as energy or high technology. Funds that purchase debt instruments may specialize further in corporate, U.S. government, or tax-exempt municipal bonds or in long-term or short-term securities.

Mutual funds are primarily held by households (around 80%) with the rest held by other financial institutions and nonfinancial businesses. Mutual funds have become increasingly important in household savings. In 1980, only 6% of households held mutual fund shares; this number has risen to around 50% in recent years. The age group with the greatest participation in mutual fund ownership includes individuals between 50 and 70, which makes sense because they are the most interested in saving for retirement. Interestingly, Generation X (18-30) is the second most active age group in mutual fund ownership, suggesting that they have a greater tolerance for investment risk than those who are somewhat older. Generation X is also leading the way in Internet access to mutual funds (see Box 2).

The growing importance of investors in mutual funds and pension funds, so-called institutional investors, has resulted in their controlling over 50% of the outstanding stock in the United States. Thus, institutional investors are the predominant players in the stock markets, with over 70% of the total daily volume in the stock market due to their trading. Increased ownership of stocks has also meant that institutional investors have more clout with corporate boards, often forcing changes in leadership or in corporate policies.

Mutual funds are structured in two ways. The more common structure is an open-end fund, from which shares can be redeemed at any time at a price that is tied

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