Encouraged by continued growth in financial markets, the number of American households investing in mutual funds has risen by more than 20 percent in the last two years, recent research shows.
But a growing share of the largest segment of that group -- shareholders in funds that invest in the stock market -- have never experienced a significant market downturn, raising questions among market analysts about just how they will react if there is a sharp decline in stock prices.
In a survey conducted in April for the Investment Company Institute, a mutual fund trade group, but not released until now, 37 percent of those questioned said they owned shares in a mutual fund that invests in stocks, bonds or money markets, up from 31 percent two years ago. That would put the number of households that own shares in a mutual fund at 37 million, the institute estimates. In 1994, 30 million households owned funds. In terms of individuals, the growth has been even more rapid. Based on its household survey, the trade group estimates that 63 million people own mutual fund shares, said John Rea, the institute's chief economist, up 66 percent from an estimate of 38 million individual shareholders that the institute has used for the last four years, based on census data. Byron R. Wien, U.S. investment strategist at Morgan Stanley & Co., said the growth of the mutual fund industry held significant implications for the future of the financial markets. "That does indicate that instead of being very narrow, ownership of mutual funds has really broadened during the 1990s," Wien said. "Since there are so many new investors in equity mutual funds, the real question mark is how they will behave when and if the market corrects. The answer, probably, is not well." The significant increase in the number of fund-owning households helps to explain the rapid growth of the mutual fund industry over the last two years, and provides support for those who argue that the sharp rise in the stock market has been aided by the floods of cash coming from mutual fund investors, particularly those who invest through retirement savings plans. Mutual fund assets rose to $3.39 trillion at the end of October, from $2.16 trillion at the end of 1994. Over the same period, stock fund assets have risen even more quickly, to $1.65 trillion, or 48.7 percent of the total, from $866.5 billion, or 40 percent of total fund assets, in 1994. But the data also contain some ominous warnings. About one-fifth of all mutual fund owners made their initial investments within the last two years, and more than 60 percent of those buyers purchased equity funds. With the U.S. stock market not having experienced a decline of more than 10 percent in six years, what those new stock market investors will do when confronted with a downturn is uncertain. Rea, the mutual fund trade group's chief economist, said he saw greater significance in the fact that two-thirds of the households that own mutual fund shares bought them before 1990. It was in October 1990 that the current bull market began. "We've had an expansion in ownership recently, but we still have a significant base of owners who have had their mutual funds for quite a while," Rea said. Therefore, while it is possible that equity funds might suffer withdrawals in a market downturn, "I don't think it will be concentrated in a short period of time." Overall, 23 percent of U.S. households owned stock funds, 16 percent owned bond and income funds, and 13 percent had money market funds, according to the survey. Households might own more than one type of fund. The research also quantified for the first time the role played by retirement savings plans in mutual fund ownership. Of the 36.8 million households that now own mutual funds, 8.7 million, or nearly 24 percent, own their funds only in a tax- advantaged retirement program, like a 401(k) or other defined contribution pension account. …