          
                                      ***
          
                    "No issuer of  securities  is subject to
                    more  detailed  regulation  than  mutual
                    funds."
          
                    Ray Garrett Jr., former chairman of  the
                    Securities and Exchange Commission
          
                                      ***
                                      
          
          The concept of mutual  funds originated in England.  British
          and Scottish investment companies (or trusts, as  they  were
          known)  helped  finance the American economy after the Civil
          War.  They did so by investing in farm mortgages, railroads,
          and other industrial companies.
          
          The first modern, open-end  investment company (mutual fund)
          was Massachusetts Investors Trust founded  in  1924  (it  is
          still operating today).  Many other funds followed until the
          stock  market crash of 1929.  Many of these first funds were
          highly leveraged and when the  market crashed - they crashed
          hard.  According to the SEC, the average dollar invested  in
          these leveraged funds in July of 1929 was worth only $.05 by
          the end of 1937.
          
          Because of  the  abuses  that  occured  in  the stock market
          during  the  1920s,  several  major  legislative  acts  were
          enacted.  Among them were the Securities Act  of  1933,  the
          Securities Exchange Act of 1934, the Investment Advisers Act
          of  1940,  and  the  Investment  Company  Act  of  1940.  In
          addition to the federal  statutes,  most states have adopted
          their own regulations governing mutual funds.
          
          These laws require, among other things, that a  mutual  fund
          be  registered  with  the  SEC  and  meet  certain operating
          standards.   Also,  mutual   funds  must  provide  potential
          investors with a current prospectus.   The  prospectus  must
          contain  information  regarding  the  fund's management, its
          investment  objectives   and   policies,   fees   and  other
          information.  The laws also limit what  a  mutual  fund  can
          state  in  its  advertisements.  These laws, as well as more
          recently  enacted   legislation,   serve   to   protect  the
          individual investor.
          
          The  various  laws  also  dictate  how  a  mutual  fund   is
          structured:
          
          There  must   be   a   custodian   whose  functions  include
          safeguarding the fund's assets.   The  custodian,  which  is
          usually  a  bank,  will  provide payment when securities are
          bought and receives payment when securities are sold.
          
          The transfer  agent,  which  may  or  may  not  be  the same
          institution  as  the  custodian,  administers  shareholders'
          account records, i.e., issues new shares,  cancels  redeemed
          shares,  and  distributes dividends and capital gains to the
          shareholders.
          
          The  investment  adviser,  which  is usually the same as the
          management company, is  in  charge  of the fund's portfolio.
          The investment adviser makes the buy and sell  decisions  of
          the  fund  and  is usually paid based on a percentage of the
          fund's assets.  The average fee  is  one half of one percent
          annually.
          
          In 1940, there were 68 mutual funds with combined net assets
          of  almost  450  million  dollars.   By  1970,  the  figures
          increased to 361 mutual funds with net  assets  of  over  47
          billion dollars.  And by the end of 1992, there were over 77
          million  accounts  in over 3,800 different mutual funds with
          1.6 trillion dollars in assets!
          
          What has  accounted  for  this  tremendous  growth in mutual
          funds?  One reason was the introduction, in the early 1970s,
          of the money market fund.   The  money  market  mutual  fund
          allowed  the  small investor, for the first time, to receive
          the relatively high,  short-term  interest  rates offered by
          the money market  that  was  previously  available  only  to
          institutions  and  wealthy  individuals.   30% of all mutual
          fund investors got their start  in mutual funds with a money
          market fund.
          
          A second reason is the dramatic  growth  in  the  number  of
          funds  available.   Since 1970 there has been an increase of
          almost 3,500 funds - a  total  of  3,848 at the end of 1992.
          These funds offer an investment objective to meet  virtually
          any investor's needs.
          
          Another reason is the  popularity  of using mutual funds for
          retirement assets.  By the end  of  1992,  there  were  24.3
          million  mutual fund IRA accounts which accounted for 21% of
          the mutual fund industry's assets.
          
          By  the  end  of  1992, 27% of U.S.  households owned mutual
          funds - this is up from just 6% in 1980.  
          
          The  median  age of mutual fund shareholders is 46.  72% are
          married and  half  have  completed  four  or  more  years of
          college.  Their median household income  is  $50,000.   They
          have  financial  assets  of $114,000 (excluding real estate)
          with mutual fund shares accounting  for 38% of these assets.
          The average shareholder owns a median of  two  mutual  funds
          from  two  mutual fund companies.  55% of mutual fund assets
          are in equity funds, 23% are in bond & income funds, and 22%
          are in money market funds.
          
          Because  of  the  growth  and  popularity, mutual funds have
          become  the  nation's   third   largest  type  of  financial
          institution  -  behind  only  commercial  banks   and   life
          insurance companies.


                                      ***

          In this chapter  we  have  given  a  brief history of mutual
          funds and who invests in them.
          
          In the next chapter  we  have  provided  a glossary of terms
          common in the mutual fund industry.  This should help you in
          understanding mutual funds and  provide  a  quick  reference
          when you come across a word or phrase you do not understand.
          

                             *** End of Chapter ***
                                 

