Mutual funds have become a boom market in the United States, a shift that has puzzled some and that many question as to its potential longevity. The boom in mutual funds has had a number of consequences for the economy and for the way individuals save and spend their money. The boom in the mutual fund market came after a period when its demise was predicted, so the change is something of a revival of what was then viewed as a less-valuable financial instrument. This revival has not been entirely welcome, however, and it has raised numerous concerns that the boom will not last and that when it bursts it will be very damaging to a lot of people who have come to rely on mutual funds for their investments and for their future.
The U.S. mutual fund industry started in the late 1920s and grew steadily during the decades after World War II. However, until recently the assets in mutual funds remained relatively modest compared to the banking system. In 1960, for instance, equity funds showed assets of $11.9 billion and bond funds showed assets of $5.1 billion. There were not yet any money market funds at that time. The bull market in the 1960s increased the equity assets of the industry to $38.5 billion, while bond funds increased to $9.1 billion during the same period. During the 1970s, assets grew very little because of the severe bear market resulting from high inflation in the middle years of the decade. When money market funds were introduced, however, the period from 1975-1980 saw the $76.4 billion in new assets. Money market funds exploded after 1978 because the Federal Reserve sharply increased money market yields to combat inflation, and at the same time banks were not permitted to offer market interest rates on their deposits until the early 1980s. Money funds therefore accounted for nearly 75 percent of the mutual fund industry's total assets by 1982 (Hale, 1994, 30).
Only fifteen years or so ago, the mutual fund ...