Mutual Fund Industry Overview

Government Regulation

Mutual funds in the United States are regulated by the U.S. Securities and Exchange Commission under the Investment Company Act. Mutual funds often are created and sponsored by various financial organizations with their own Board of Directors for fund oversight. The Board then hires an investment adviser from a separate entity to manage fund investments. Investment advisers with fund assets under management above $25 million must register with the SEC. The law also requires mutual funds to state in fund prospectus their investment objectives that must be followed by fund managers when making investment decisions.

The mutual fund industry is highly competitive as new funds can enter the market easily at relatively low costs. With proper registration, banks, brokerage firms, investment management companies and other financial organizations can get readily involved in the mutual fund business without encountering any significant barriers to entry. Requirements on the amount of starting capital and any necessary technology for the mutual fund industry are not as demanding as for many other businesses. Moreover, the expected profit from running a mutual fund is fairly predictable as funds customarily charge a fixed percentage fee out of the value of the assets managed, another incentive for new entrants. As a result of the vast number of mutual funds in operation, funds have to compete on many fronts including product offerings, performances and fees.

Investor demand for mutual fund products plays a vital role in the growth of the mutual fund industry. Financial investing is a skilled profession that requires both experience and expertise, and many individual investors prefer to place their money under some kind of professional management such as using a mutual fund. The needs of saving for retirement by individuals with both corporate-sponsored and personal-directed retirement plans in the U.S. further support the demand for mutual fund services. Mutual funds can also provide diversification and economies of scale that can lower risks and transaction costs, important to improving investment returns.

To stay competitive and meet the needs of investors with different levels of risks and return expectations, the mutual fund industry together offers a universe of mutual fund products based on asset classes, investment styles, securities of specific risk characteristics and capital preservation verses capital appreciation. To attract investors, some funds have developed their own fund complexes, or investment supermarkets, that feature an array of interconnected, individual funds within a mutual fund family. Mutual fund products are marketed to households through their financial planners, banks, brokers and insurance companies. Investors can also conveniently invest in mutual funds by directly contacting fund companies.