In my analysis of investment vehicles, I am often asked about longevity. While investors focus on performance and fees, they rarely consider the mortality of the fund itself. A mutual fund is not a perpetual entity; it is a product with a lifecycle. Its existence hinges on a delicate balance of profitability, performance, and investor interest. The notion of an “average life” is not a simple statistic but a narrative of competition, failure, and success. Understanding this lifecycle is crucial because investing in a fund that is nearing its end can be a costly and disruptive experience.
Today, I will break down the concept of a mutual fund’s average life. We will explore the distinct phases from launch to liquidation, analyze the data on fund survival rates, and identify the key factors that determine whether a fund thrives for decades or is shuttered within a few years. This knowledge will empower you to choose not only a good fund but a durable one.
Table of Contents
Defining “Average Life”: It’s Not About Age, It’s About Survival
The “average life” of a mutual fund can be interpreted in two ways, both critical:
- The Average Lifespan of All Funds: This is a statistical measure of how long funds tend to survive before being merged or liquidated. This number is heavily skewed by the high rate of attrition in the early years.
- The Weighted Average Life of a Bond Fund’s Holdings: This is a technical term primarily used for bond funds, representing the average time until a bond’s principal is repaid. This is a measure of interest rate risk.
For this analysis, we will focus on the first definition: the fund as an ongoing concern.
The Four Stages of a Mutual Fund’s Life
A mutual fund’s journey typically follows a predictable path, though few travel its entire length.
Phase 1: Inception and the “Critical Mass” Period (Years 0-3)
A fund is launched, often based on a specific investment thesis or a star manager’s reputation. The initial years are a fight for survival. The fund must attract enough assets to become profitable for the fund company. The expense ratio is often high initially due to low assets spreading fixed costs thinly. This is the period of highest risk. Studies show a significant percentage of funds disappear during this phase, either due to failure to attract capital or abysmal initial performance that scares away investors.
Phase 2: Growth and Establishment (Years 3-10)
Funds that survive the initial gauntlet enter a growth phase. Strong performance attracts assets, lowering the expense ratio through economies of scale. The fund establishes a track record and a identity. It is during this phase that a fund truly proves its worth and builds a loyal shareholder base.
Phase 3: Maturity and Stewardship (Years 10-20+)
The fund has become a established player, often with billions in assets. The original manager may retire, presenting a key-person risk. The focus shifts from aggressive growth to steady stewardship and asset retention. Performance may revert to the mean, but the fund’s size and brand name allow it to persist.
Phase 4: Decline and Liquidation/Merger
A fund enters decline for several reasons: prolonged underperformance, the departure of a star manager, or a shift in investment trends that makes its strategy obsolete. As investors redeem shares, the fund’s expense ratio may creep up again as fixed costs are spread over a shrinking asset base. Eventually, the fund company decides it is no longer economical to run and announces a merger into a more successful fund or a full liquidation.
The Data: What is the Average Lifespan?
The survival rate of mutual funds is lower than most investors realize. Research from firms like Morningstar and S&P Dow Jones Indices (SPIVA) consistently shows that a large number of funds are merged or liquidated every year.
A seminal SPIVA report found that over a 20-year period, only about 45% of U.S. equity funds survived and outperformed their benchmark. The rest were either liquidated/merged (underperforming) or survived but underperformed.
The attrition is not linear. The probability of failure is highest in the first few years. A fund that survives its first five years has a significantly higher chance of making it to its tenth year, and so on. While an exact “average life” is difficult to pin down, we can look at survival rates over time.
Table 1: Hypothetical Survival Rate of U.S. Equity Mutual Funds
| Period Since Inception | Approximate Survival Rate | Primary Reason for Attrition |
|---|---|---|
| 5 Years | ~60% | Failure to attract sufficient assets; poor initial performance. |
| 10 Years | ~40% | Continued underperformance; investor outflows. |
| 15 Years | ~30% | Strategy obsolescence; manager departure. |
| 20 Years | <25% | Mergers for efficiency; prolonged track record of mediocrity. |
This data suggests that the average fund has a less than 50/50 chance of surviving even a decade. The “average life” of the funds that fail is likely short, pulling down the overall average for all funds.
The Key Drivers of a Fund’s Longevity
From my experience, a fund’s lifespan is determined by three core factors:
- Assets Under Management (AUM): This is the most straightforward factor. AUM equals revenue for the fund company. There is a minimum threshold below which a fund is unprofitable to operate. A small-cap fund might need \text{\$100 million} to be viable, while a large-cap fund might need \text{\$500 million}. A fund lingering below this threshold is a prime candidate for liquidation.
- Performance Relative to peers and benchmark: Consistent bottom-quartile performance leads to investor redemptions, which shrinks AUM and creates a death spiral. Even average performance can be a death sentence if a cheaper index ETF is available as a superior alternative.
- The Stability of the Fund Family: A fund from a large, established provider like Vanguard or Fidelity is less likely to be liquidated abruptly than a fund from a smaller, niche provider. Large families can subsidize a underperforming fund for longer or merge it seamlessly into another strategy.
The Investor’s Guide to Assessing Fund Longevity
When evaluating a fund, its age and stability should be a key part of your due diligence. Here is what to look for:
- Check the Age: A fund with a 20-year track record has already passed through the riskiest early phases. It has proven its durability through multiple market cycles.
- Analyze the AUM Trend: Don’t just look at the current AUM. Look at its trajectory over the past 5 years. Is it growing, stable, or shrinking? A fund in a steady decline is a red flag.
- AUM Growth Calculation: \text{AUM Growth Rate} = \frac{\text{Current AUM} - \text{AUM 5 yrs ago}}{\text{AUM 5 yrs ago}} \times 100
- Read the Prospectus for “History”: The summary prospectus will often state if the fund is a new one or has a long history. It will also disclose any major changes in investment objective or strategy.
- Prefer “Strategic” over “Thematic” Funds: A fund based on a long-term, strategic asset allocation (e.g., “Total Stock Market”) is far more likely to persist than a fund based on a hot theme (e.g., “Metaverse ETF” or “Millennial Consumer Fund”). Thematic funds are often launched at the peak of a trend and are quick to die when the trend fades.
The Inevitable End: What Happens in a Merger or Liquidation?
If you own a fund that is being closed, you have two likely outcomes:
- Merger: Your shares are automatically converted into shares of the acquiring fund. This is often a taxable event if held in a taxable account—you are deemed to have sold your shares in the original fund, potentially triggering capital gains taxes. You must then evaluate whether the new fund aligns with your goals.
- Liquidation: The fund sells all its holdings and distributes the cash proceeds to you. This is a definite taxable event if there are any capital gains. Your investment process is forced to restart.
Both scenarios create unwanted tax consequences and disruption, underscoring why investing in a fund with a high probability of survival is so important.
The Final Calculation: Prioritize Durability
The average life of a mutual fund is a story of a harsh, competitive environment where only the strong survive. While past performance is no guarantee of future results, past survival is a indicator of a fund’s economic viability and resilience.
Therefore, your investment checklist should extend beyond past returns and fees. Ask yourself: “Does this fund have the assets, the strategy, and the backing to still be here in 15 years?” By favoring established, strategically sound funds with strong and stable asset bases, you are not just betting on performance; you are investing in a vehicle built to last. In the long journey of wealth building, the durability of your chosen vessel is just as important as the speed at which it sails.
