Recent Trends in the Mutual Fund Industry

By Mack, Phillip R. | Federal Reserve Bulletin, November 1993 | Go to article overview

Recent Trends in the Mutual Fund Industry


Mack, Phillip R., Federal Reserve Bulletin


Mutual fund assets have grown more than twelve-fold from 1980 to mid-1993 and by half in the last two years of that period. Most of this growth has come from net purchases of fund shares by the public, rather than from price appreciation, and it has lately reflected a choice by investors to move funds out of depository institutions. In 1992, the public made net purchases of $206 billion of mutual fund shares, while making net withdrawals from their deposits at banks and thrift institutions. In turn, mutual funds supplied about one-fourth of funds raised by the domestic nonfinancial sectors of the economy last year, while depository institutions provided only about one-tenth. In short, mutual funds are now a significant competitor of depository institutions for household savings and, with more than $1.8 trillion in assets, they are a major source of funds in the capital markets.

Several factors underlie the recent surge in mutual funds. One is the drop in rates on deposits--especially short-term deposits--to relatively low levels at a time when rising stock and bond prices have been generating higher returns. As a result, households seeking to maintain satisfactory returns on their savings have been drawn to capital market instruments, especially mutual funds, whose diversification and liquidity offer advantages over direct investments in securities. In addition, the benefits of economies of scale in the mutual fund industry have been shared with investors through a widening array of services provided by fund families. Finally, many funds have eliminated or substantially reduced the sales commissions, or loads, they charge to investors.

Corporations with access to the capital markets, including firms with lower credit ratings, have benefited from the expanded supply of investment dollars represented by the surge in mutual funds. State and local governments also have benefited, with inflows to tax-exempt mutual funds running at a record pace since the end of 1992. Moreover, in recent years, smaller corporations raising equity through initial public offerings, as well as established firms, have seen mutual funds purchase a significant portion of the new equity they have sold.

In response to the growth of the funds industry, banks have increased their participation in the provision of mutual fund services. For example, many banks sell mutual fund shares to their retail customers and, in some cases, act as an investment adviser to mutual funds and provide other related services. The increased involvement of banks has brought attention to their role in the sale of mutual fund shares, including their responsibility for ensuring that customers are made aware of the differences between mutual fund shares and insured deposits.

The expanding role of mutual funds has had at least two important implications for the performance and structure of the financial markets. By offering households more diversified investment opportunities and corporations a greater market for their financial instruments, mutual funds have improved the efficiency of financial intermediation by reducing transaction costs. And as intermediaries competing with banks and thrift institutions, mutual funds have contributed to the reduction of the role of these depositories as providers of credit in the intermediation process and consequently have affected the relationship between money and economic activity.

TYPES OF MUTUAL FUNDS

A mutual fund is a type of investment company. An investment company sells shares or certificates that represent an interest in a pool of financial assets; a mutual fund (technically an open-end company) is an investment company that continuously issues and redeems its shares. The price of such shares, apart from any brokerage commissions, equals the net asset value of the fund, determined by dividing the market value of the fund's assets, less any liabilities, by the number of outstanding shares. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Recent Trends in the Mutual Fund Industry
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.