The Fund Shakeout Is Good for You

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It looks as if fund companies are going to start cutting back, but their loss stands to be your gain.

In the 1990s, folks had money in their pockets and a mind to invest for retirement and other goals. To sate rising demand, fund companies rolled stock funds off the assembly line by the dozen, many of them betting heavily on the then-sizzling tech sector. But the past year and a half has reversed the good fortune of stocks in general and tech in particular, starving funds of both assets and potential buyers.

Now fund companies are closing funds and merging them together to reduce costs. Though the idea of fewer funds might rattle you, it will probably add up to improved funds with more discipline and fewer gimmicks in the end.

"I absolutely think we'll see fewer funds, and that's good for investors," says Jim Folwell, a fund industry consultant with Boston-based Cerulli Associates. "It will be survival of the fittest."

Here are five reasons the stock-funds universe is due to shrink:

1. There are too many small funds with lousy track records. ...