Mutual funds, part I: reshaping the American financial system

Since the mid 1980s the mutual fund industry has enjoyed explosive growth in the number of funds, the types of funds available, and total assets under management. Much of this growth is the result of the increasing convenience offered to owners of long-term assets. Mutual funds offer portfolio diversification and financial research unavailable to the individual investor. They do this in an economical way through economies of scale, and they provide liquidity not available to the owner of individual shares or debt instruments. It should come as no surprise that the proportion of equity and debt instruments held through mutual funds has risen relative to outright ownership.> This article provides a broad overview of the mutual fund industry, examining the mutual fund concept, mutual fund regulation, and taxation. The author discusses the direct and indirect costs of holding mutual fund shares, and he examines the growth, liquidity, and redemption experiences of mutual funds. He also looks at the relationship of mutual funds to financial market performance. He finds that mutual funds have been remarkably resilient institutions. Even during the stresses of 1987, industry liquidity remained sufficient to allow share redemptions without threatening the security markets.