MUTUAL FUNDS .1. RESHAPING THE AMERICAN FINANCIAL-SYSTEM

Since the mid 1980s the mutual fund industry has enjoyed explosive gro wth in the number of funds, the types of funds available, and total as sets under management. Much of this growth is the result of the increa sing convenience offered to owners of long-term assets. Mutual funds o ffer portfolio diversification and financial research unavailable to t he individual investor. They do this in an economical way through econ omies of scale, and they provide Liquidity not available to the owner of individual shares or debt instruments. It should come as no surpris e that the proportion of equity and debt instruments held through mutu al funds has risen relative to outright ownership. This article provid es a broad overview of the mutual fund industry, examining the mutual fund concept, mutual fund regulation, and taxation. The author discuss es the direct and indirect costs of holding mutual fund shares, and he examines the growth, liquidity, and redemption experiences of mutual funds. He also looks at the relationship of mutual funds to financial market performance. He finds that mutual funds have been remarkably re silient institutions. Even during the stresses of 1987, industry liqui dity remained sufficient to allow share redemptions without threatenin g the security markets.