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The modern mutual fund was born in 1924, when the Massachusetts Investors Trust opened its doors for business Remarkably, the fund, which today goes by the name MFS Massachusetts Investors Trust, is still open to new shareholders Even more remarkable, since the turn of the century, mutual funds have become so popular that they have attracted more than $7 trillion in total assets (Figure 8-1), making them the favorite way for Americans particularly middle class households to invest Mutual funds began to get popular in the 1980s and 1990s, when the booming stock market gave rise to an entirely new generation of investors who grew to like investing, but also were forced to invest for their own retirement through 401(k) and similar de ned contribution plans During the bull market of the 1980s and 1990s, funds helped democratize Wall Street, and now a majority of households are investors (Figure 8-2) This is especially true with retirement accounts, where individuals have the choice of investing in an array of funds But while mutual funds made life simpler for investors since many of us don t have the time or the interest to research more than 10,000 stocks to decide which ones to invest in the irony is, choosing a fund today can be just
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Demystifying Mutual Funds I
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Fig 8-1 Total Mutual Fund Assets (in Billions of Dollars) Today, the mutual fund industry controls more than $7 trillion in assets
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Fig 8-2 Number (in Millions) of Households That Own Funds As this graph illustrates, the number of American households that invest in mutual funds skyrocketed in the 1990s That decade was also the period in which 401(k) retirement plans, which utilize funds as investment options, rose into prominence
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as daunting as selecting the individual securities they invest in Why Because there are more mutual funds to choose from today than individual stocks listed on the New York Stock Exchange, the Nasdaq national market, and the American Stock Exchange At last count, there were more than 16,000 mutual funds in existence, according to the fund tracking service Morningstar (Figure 8-3)
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Fig 8-3
PART 2 Your Assets
Mutual Funds Gone Wild*
Type of Fund Domestic stock fund International stock fund Balanced funds Taxable bond fund Municipal bond fund Large growth stock fund Large value stock fund Small growth stock fund Small value stock fund
*Data as of March 31, 2004 Source: Morningstar
No Funds 9,503 2,052 1,455 2,940 2,059 1,355 1,076 714 307
What a Mutual Fund Is Not
Contrary to popular belief, mutual funds are not technically an asset like stocks, bonds, or even cash Rather, they are vehicles that allow investors to put money to work into stocks, bonds, and/or cash Think of them as envelopes in which you hold individual securities, though actually they re a lot more than that When you buy a fund, you are in essence handing money over to a professional money manager who pools your dollars along with the assets of thousands of other investors to build a single portfolio of securities The fund itself is considered an investment company whose sole mission is to invest in nancial securities to maximize your gains (and hopefully minimize your risks) The mutual fund industry itself is governed under the Investment Company Act of 1940, which launched a series of regulations that require funds to be diversi ed, open, and considerate of the best interests of its shareholders The existence of these regulations make mutual funds far safer entities than, say, hedge funds, which can invest in all sorts of di erent ways but face far fewer regulatory safeguards When you put money into a fund, you own a portion of the portfolio, alongside thousands of other shareholders Hence the name: It is mutually owned by you and your peers In this sense, the di erence between investing in stocks on your own and buying a stock fund is like that between buying your own house and buying a professionally managed condo And, as with all things that are jointly owned, there are pros and cons, which we will discuss in a moment
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