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Chapter 11. The Retail Investor: Victim ... > Why Mutual Funds Got on the Bandwago...

Why Mutual Funds Got on the Bandwagon

During the bubble, Americans began to invest in mutual funds in unprecedented numbers. By 2000, more than 50 percent of American households owned shares in mutual funds, the percentage having almost doubled during four years that saw the start and growth of the Internet bubble. Great sums went into the mutual funds, rose in value during the bubble, and then crashed. How did this happen and why did mutual funds get into the business of speculating in Internet stocks?

Mutual funds compete for investors' dollars largely on the basis of the return shown by the fund, and investors' money can be very hot—that is, investors can jump from fund to fund seeking the highest recently reported return. Mutual fund returns are publicized by Morningstar and other rating services so that investors can compare them. When some mutual funds went into the bubble and showed substantial percentage returns, investors moved their money to those funds. Other fund managers then felt obligated to raise their returns by investing in dot-com stocks. Otherwise, they feared they wouldn't be able to compete for investors' money.


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