Question: How Do Mutual Funds Interact With the US Economy?
A good mutual fund reflects how an industry or other sector is doing. For example, a mutual fund that focused on high tech stocks would have done extremely well up until March of 2000, when the tech bubble burst. As investors realized that the high tech companies were not returning profits, they started selling the stocks, and so the mutual funds declined. As the mutual fund/stock prices declined, the high tech companies could not remain capitalized, and many went out of business. In this way, mutual funds and the US economy are inter-related.
Due to the nature of the stock market, upon which mutual funds are based, mutual fund values will change on a daily basis...sometimes radically. The economy is much slower moving, so that wide variations in a fund do not necessarily mean that sector is gyrating as much. However, if a mutual fund price declines over time, then it is a good bet that the sector it tracks is also growing more slowly.
Mutual Funds FAQ