Almost $1 of every $5 in financial assets owned by US households is invested in mutual funds. Comprised of equities, bonds, or a hybrid, these funds are a growing component of Americans’ savings. Whether earmarked for specific future needs (such as college or retirement) or just serving as a vehicle for increasing wealth, mutual funds are one of the most important and widely used of all investment mechanisms.
Mutual fund assets have grown by almost 700% since 1990 according to the Investment Company Institute, the national association for the investment company industry. From a level of approximately $1.07 trillion in 1990, they skyrocketed to reach $7.41 trillion in 2003. This remarkable growth has two components: net new investment volume and gains in the value of the underlying equities and bonds.
Net new investments (cash inflow less cash outflow) over the 1990-2003 period totaled more than $3.29 trillion. Last year (2003) was the first net cash outflow since 1988, driven primarily by a shift from money market funds to bank and savings deposits and other investment instruments. Even with 2003’s $43 billion net outflow, fund asset values approached record highs.
Growth in the value of underlying investments accounted for the remaining $3.05 trillion in mutual fund asset value expansion. Clearly, many Americans are reaping the rewards of ownership. These funds have the unique ability to provide much-needed portfolio diversification and insulation from the volatility of individual stocks. In addition, some funds have historically been able to outperform broader market measures thanks to the expertise of their managers. (Of course, there are also many funds that compare poorly to the S&P 500 and other widely used market indicators, and past results are no indicator of future success.)
While finance purists might debate the merits of various types of funds, the bottom line is that people in the US are buying them and relying on them as never before. Without a doubt, the bursting of the Internet/technology stock bubble and the other trouble the market experienced in the wake of an economic slowdown and the terrorists’ attacks of 2001 scared some people away. However, as the market recovers and portfolios are realigned, it is likely that the money flowing into mutual funds will continue its rapid upward trend.
Owners of mutual funds are a diverse group. About 91 million people in 53.3 million households owned mutual funds in 2003. Almost half of all US households currently hold such assets, down slightly over the past few years in the wake of the 2000-2002 bear market.
The average age of owners was 48 (as of 2004) and baby boomers made up almost half of the mutual fund investors. About one-fourth of mutual holders were older; another one-fourth were younger. In general, owners had college or post-graduate degrees and household income of $68,700.
It is important to note that this household income level is a median level, meaning that half of all mutual fund owner households had incomes of less than that amount. In addition, super-wealthy households do not skew the figure upward; Bill Gates is counted exactly the same as a 2-income household earning $70,000.
There are several specific reasons Americans invest in mutual funds. About a third of year-end 2003 mutual fund assets were earmarked for retirement use; funds make up an estimated 22% of all investments for retirement. In fact, some 63% of those who own such investments purchased them through a defined contribution retirement plan. As a substantial segment of the baby boomer generation enters its peak earning years and faces retirement, the level of these funds is expected to expand. IRAs are an important component of this investment tool.
The vast majority of households with children point to their education as a key reason for saving and investing. About a third of those who own mutual funds cite paying for college as a major goal for their investment. As legislation renders education savings plans increasingly attractive, that segment of the market will undoubtedly continue its strong growth curve.
In short, there are as many reasons for saving and investing as there are people in America. Each of us is pursuing our own goals and desires; enhancing our financial assets is important to achieving them. Whether a baby boomer nearing retirement or a household with young children, mutual funds represent one of the most widely used vehicles to reach financial goals and independence.