Emerging Industry Overview: Mutual Funds

Industry Snapshot

As one of the most popular investment vehicles in the United States, mutual funds take money from public investors and invest it as a collective institution. Investment decisions are made by a fund manager chosen by the board of directors. The fund manager is responsible for making the right picks to deliver strong returns to investors. While there are mutual funds for every type of investor, from the tycoon to the neophyte, they can be particularly attractive to inexperienced investors, not only because fund participants are not charged with direct control over investment but also because these funds limit risk exposure. Since mutual funds are spread out over a number of different investments, a washout in one will not deplete the entire investment pool.

Although U.S. mutual funds had held their own through the stock market bubble burst of 2000 and early on in the sluggish economy that followed, shedding a few lackluster funds and losing a few million small investors even while assets hovered near historic highs, by 2002, a torrent of investors, both individual and institutional, had begun reducing holdings in mutual funds, including a heavy pull-out from money market funds, possibly to seek higher returns elsewhere. Retrenchment carried into the following year, but while asset flows began to improve, a flurry of legal and ethical questions began to dog fund managers on issues ranging from asset valuation to improper trades. By 2004, federal and state regulators had charged several top-shelf fund companies with fraud, leaving a chain of fund managers and executives disgraced and unemployed, and Congress passed new legislation to curtail a number of practices seen as harmful to investors.