These versatile investments have revolutionized accessibility and affordability for Americans, particularly in the middle class, to participate in diverse financial markets including stocks, bonds, real estate, commodities, and foreign investments.
Mutual funds have proven their resilience through recessions, wars, and other disruptions, becoming staples, especially in retirement accounts, since the debut of the first fund, the Massachusetts Investors Trust, in 1924.
“Mutual funds have played a pivotal role in democratizing investing, enabling 116 million Americans to engage in financial markets,” noted Sean Collins, chief economist at the Investment Company Institute, the fund industry’s trade group. “Their enduring appeal and the trust investors place in them are a testament to their growth and evolution over the past century.”
How widespread are mutual funds?
For many middle-class investors, owning one or more funds is commonplace. According to the institute’s 2024 Fact Book at icifactbook.org, over 71 million households, or 54% of total households, hold at least one mutual fund. Younger investors often gain initial exposure through retirement accounts like 401(k) plans, which typically offer a selection of investment options. On average, fund-owning households allocate approximately $125,000 across three different funds.
Alan Norris, a certified financial planner and accredited investment fiduciary in Phoenix, affirmed the increased accessibility of markets: “They have provided an avenue for middle America to leverage a wide range of investments.”
Mutual funds also wield substantial influence in financial markets, owning approximately 33% of U.S. stocks, 22% of domestic and international corporate bonds, and 27% of municipal bonds, according to the institute. By pooling investments from millions, funds facilitate large-scale purchases.
Are mutual funds popular internationally?
While the fund industry is global, its prominence varies. In contrast to the U.S., where mutual funds hold nearly twice as much wealth as bank deposits and currencies, in Japan, the ratio is 53 to 5 in favor of bank deposits. Similarly, citizens of the European Union allocate approximately three times more to bank deposits and currencies than to mutual funds.
U.S. households possessed $33.6 trillion in mutual fund assets by the end of 2023, compared to $35.3 trillion collectively held by all other countries. Individual investors own 88% of U.S. fund assets.
Have mutual funds become better investments?
Broadly speaking, yes. A significant indicator of this improvement is the marked decrease in investor costs. Today, the vast majority of funds are sold without commissions or loads that previously compensated brokers.
Decades ago, funds commonly imposed upfront fees as high as 8.5%, but no-load funds are now the norm. Approximately 92% of long-term funds are now sold without a sales load or the related 12b-1 charge, up from 46% in 2000.
Additionally, ongoing expenses covering portfolio management and shareholder services have also decreased. In 2000, average expenses for stock funds were 0.99% (approximately $9.90 per $1,000 invested); by 2023, this figure had dropped to 0.42% ($4.20 per $1,000). Bond fund expenses have shown a similar decline, from 0.76% to 0.37% over the same period. As funds have grown larger and more competitive, costs to investors have reduced, noted Norris.
Another fund type, exchange-traded funds (ETFs), further economize costs. Typical stock ETF expenses averaged 0.15% in 2023, with bond ETFs at 0.11%. ETFs benefit from lower costs, partly due to less active management compared to traditional mutual funds.
Index funds, whether traditional funds or ETFs, are also cost-effective options. These funds replicate market indexes such as the S&P 500, minimizing trading and management expenses.
Are mutual funds risky?
Yes, as they expose investors to potential losses during market declines. When stock and bond prices fall, mutual fund values typically follow suit. However, fund diversification — holding dozens, hundreds, or thousands of securities — helps mitigate risks. The failure of one or a few holdings is unlikely to severely impact an entire fund.
Money market funds, another fund type, lack deposit insurance similar to bank accounts. Nonetheless, their record of safety is nearly flawless. These funds primarily hold short-term debt issued by corporations, banks, the U.S. Treasury, and various governments, typically of high credit quality and short maturities.
The fund industry has thrived for a century without direct federal government backing, a notable achievement amidst widespread expectations of government support in other sectors.
