Aug. 15 (Bloomberg) - After a 2 1/2-year bear market for stocks, the casualty toll in the mutual-fund business is remarkably light.

As of mid-2003, according to the Investment Company Institute, there are 8,212 funds doing business in this country. The total is down a mere 141, or less than 2 percent, from the all- time high of 8,353 in March 2002.

Since March 2000, the month the Standard & Poor's 500 Index topped out in the stock market, the number of funds has actually grown by 345, or 4.4 percent.

This will draw few cheers from fund critics, who began complaining long and loud in the roaring 1990s that there were too many funds. Look, they said, the number has ballooned far beyond the total of securities listed on the New York Stock Exchange, which stood at 3,560 the last time I checked.

On closer inspection, that comparison is meaningless. Funds hold portfolios of numerous securities mixed together. They may also own stocks and bonds not listed on the NYSE. The number of possible combinations from both NYSE and non-NYSE offerings could justify funds by the millions if that were what investors wanted.

Both Sides Now

Another strange thing about the too-many-funds complaint: It is often raised right alongside laments that there isn't enough price competition among funds. The industry is simultaneously accused of giving us too much and not enough.

``Certainly, the mutual fund industry is competitive,'' say Gregory Baer and Gary Gensler in their 2002 book ``The Great Mutual Fund Trap.'' ``There are thousands of funds and hundreds of fund companies.''

``That does not mean, however, that the industry competes on cost,'' they argue. ``Mutual funds compete on service and hope of outperforming the market. Cost is an afterthought for the customer.''

Now, one could counter that the customers treat cost as an afterthought because saving on expenses isn't their ultimate objective. Their aim is to get a reasonable return consistent with the amount of risk they are willing to take. Costs are only one element of that.

Ace in the Hole

Since fund returns include management fees and operating expenses, in any performance comparison between similar funds the lower-cost rival enjoys a competitive edge. This edge will make its presence felt in the numbers even if the marketing department never mentions fees in the fund's advertising and promotional brochures, and if investors never read the prospectus.

One thing is for sure -- with all those 8,212 funds on the market, investors see a lot of marketing and advertising. The question is, what do fund managers get out of all the trouble and expense of maintaining so many brand names?

For a partial answer, let us turn to a recent study by two professors, Barbara Kahn of the University of Pennsylvania's Wharton School and Brian Wansink of the University of Illinois, that focused on a different business, bulk candy stores.

In these ``candy jungles,'' as Kahn describes them, customers are presented with a seemingly boundless array of choices. ``Do people buy more when they see what looks like unlimited variety?'' the professors sought to determine through a series of experiments.

Stimulus

Yes, they concluded: ``The perception of variety, even when illusory, stimulates people to consume more.''

This backs up what we can sense intuitively while walking the corridors of any modern shopping mall. As the choices available to a food lover expand, so too may his consumption -- and his weight, most likely. By that same logic, a plethora of mutual fund choices works to encourage, and increase, investing.

Now, in matters of food, over-consumption is a problem. Some would say we have over-investment issues as well -- in the words of one thoughtful reader of this column, too many dollars chasing too few good stocks.

But from a personal-finance point of view, most people are hardly over-prepared for retirement, or for their children's college tuition, or other big obligations of life. They need to save more.

So the hyper-abundance of choices offered to fund investors serves a positive purpose. And an informed investor setting out to choose funds from that vast array could legitimately feel, well, like a kid in a candy store.

Last Updated: August 15, 2003 10:28 EDT