was considered an endangered species as investors pulled money out of these funds at a higher rate than they were putting it in, and the number of funds was shrinking. Today, people are putting money into mutual funds at the rate of $1 billion a day, and the mutual-fund assets stand at $1.6 trillion, compared with less than $50 billion in 1977. Some estimate that the amount could reach $4 trillion by the end of the decade. Mutual funds pool investors' money and buy stocks, bonds, and money-market securities, and individuals get greater diversification while also being exposed to less risk. They also expect lower transaction costs and the support of more professional management than they could achieve on their own. These funds also have the power, through pooling, of turning illiquid investments such as municipal bonds, junk bonds, or small-company stocks into highly liquid ones. Through this process, mutual funds have affected the entire economy in ways that macroeconomists are only beginning to see.
It has affected the money supply, for instance, which is a traditional measure of future economic activity. Because mutual funds have higher yields, many investors have moved their money to short-term bond funds where the money is not counted as part of the money supply and thus out of the bank money-market accounts where it is. Mutual funds have thus redefined the meaning of "money." Mutual funds have had an impact on the stock market and are seen by some as being the stock market today. Mutual funds are making it easier for emerging companies to get new equity capital, and even mature companies are now able to raise equity more cheaply.
Governments have found tax-exempt funds to be a mother lode, the major source of capital needed to refurbish and expand the country's aging infrastructure. Hundreds of municipalities would find it more difficult to sell their bonds if it were not for the marketing might of mutual funds ...