Question

5. Why did the proportion of equities in long-term funds increase from 38.3 percent

in 1990 to over 70 percent by 2000 and then decrease to 63 percent in 2009? How

might an investor’s preference for a mutual funds objective change over time?

Answer 1

Mutual Funds started growing tremendously in 1990, where there were near-perfect set of economic conditions like strong economic and corporate profit growth, low inflation, technological innovation, exceptional stock returns and relatively low interest rates all favored financial instruments.

As the new millennium came, there has been household shift to Mutual funds i.e., by 1999, mutual funds accounted for 28% of household discretionary financial assets, up from 12% in 1990 as investments through mutual funds leads to asset diversification and professional way for investment. Another reason for mutual funds growth was the expanding business of funds in Retirement market and pensions.

However due to growth of equity market all around the world, there were many scandal like Enron or dot-com companies bubble where investors starts losing their confidence in equities. In 2007, burst of real estate bubble i.e., when housing price crash leading to the great recession due to sub-prime loan loses began the crisis and exposed other risky loans and over-inflated asset prices; which again shaken the equity market.

Investors preferences towards mutual funds has changed over time looking at the ups and downs of the stock market. Say, investors used to invest in late 1990s looking at the economic condition and growth in the equity market. Another reason was low interest bearing debts to be considered as investment option. Eventually there was awareness of mutual funds as a more professional way for investments as cost of investing through mutual funds have reduced. Mutual Funds started expanding and diversifying their products catering to every investor needs giving another reason for investor to prefers mutual funds.