You might have read or heard recently that "the mutual fund bubble" is about to burst. What does that mean to you as a mutual fund investor? If you consider such comments in the context of fund industry trends, you may not be so worried.
But, first, note the improper use of the term "mutual funds" by some commentators who:
* Treat mutual funds as equity funds, which account for only 31 percent of the industry's total assets -- and ignore bond and money market mutual funds, which account for 36 percent and 33 percent, respectively.
* Seem to regard mutual fund shares as a class of financial assets, such as common stocks or bonds. They don't recognize that funds are simply vehicles for investing in classes of financial assets.
What concerns do the critics commonly express?
* Fund industry growth. Some imply that the surge of cash into the fund industry's coffers reflects a sort of speculative madness, resembling binges in which buyers of stocks or land bid their prices up to excessive levels -- only to see them collapse.
Although the fund industry is large and growing -- its $1.7 trillion of assets represents a 20 percent increase from a year ago -- the prices of stocks and bonds in fund portfolios are no more excessive than the prices of the same securities owned by other investors. It's these prices, updated daily, that funds' asset values are based on.
To the extent that the fund industry's growth represents the net of share sales over redemptions (as opposed to appreciation), it indicates the preference that investors have shown for the professional management and diversification that funds offer.
At the end of 1992, according to the Federal Reserve's latest data, the $897.5 billion of bond and equity fund shares held by households accounted for 5.6 percent of this sector's total financial assets, up sharply from the 0.9 percent that $66.7 billion such shares represented 10 years earlier. (At 2.9 percent, money market funds essentially maintained their allocation.)
* Number of funds. Critics say there are too many mutual funds, with some pointing out that there are more funds (3,137 equity and bond funds, according to the Investment Company Institute's last count -- up 478 from a year ago) than stock issues listed on the New York Stock Exchange (2,731). While that ignores 2,313 NYSE-listed bond issues, the comparison is irrelevant.
Nevertheless, the number of equity and bond funds clearly is large and may be intimidating when you look for a fund to invest in.
In light of the industry's ease of entry and advisers' pursuit of money to manage, the large number should not be surprising, however.
Much of the proliferation of funds is due to fund groups expanding their selections across the range of equity and fixed-income types.
Funds that turn out to be superfluous to investors' needs or poorly managed eventually are terminated or merged into others.
* Novice managers. Because a large number of today's equity and bond fund portfolio managers are relatively new and have little experience with corrections -- many were named since 1987 -- critics question how well they would perform when prices eventually fall.
To address that concern, when choosing funds, look for those whose managers have run them well in both up and down markets.