Encouraged by continued growth in financial markets, the number
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
chief economist, up 66 percent from an estimate of 38 million
individual shareholders that the institute has used for the last
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
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
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. …