A new do-it-yourself fund

James O’Shaughnessy, the author of the best-selling personal finance book “What Works on Wall Street,” is rethinking what works in the mutual fund business, and it ain’t mutual funds.

In June, Mr. O’Shaughnessy sold his two mutual funds, which held a combined $250 million, to launch Manhattan-based Netfolio Inc. Beginning this month, his company will offer investors the ability to build and trade their own funds online.

Dubbed personal funds, these accounts will be specialized for each client according to their risk tolerance and investment horizon. Netfolio clients will know their exact holdings and will be able to add or jettison stocks. Mr. O’Shaughnessy says his personal funds are cheaper to buy and run than mutual funds.

“The era of communal bathing in the financial services industry is over,” says Mr. O’Shaughnessy. “We think the mutual fund business will be replaced by the personal funds.”

Mr. O’Shaughnessy’s thinking may seem lofty, but he’s not alone. A number of startups offer individuals the ability to customize portfolios.

BuyandHold.com Inc., also based in New York, lets investors buy fractions of shares. Other companies such as Foliofn Inc., based in Vienna, Va., and Netfolio allow investors to buy a basket of stocks for a flat fee rather than paying for each trade.

But the startups come at a time when the mutual fund industry has never looked stronger. Mutual funds now outnumber publicly traded stocks. As the market has slipped, many investors have ditched stock picking for mutual funds.

Safety factor

From March though July, investors poured $131 billion into mutual funds, up 50% from the amount added during the same period last year.

“Only 15% to 20% of all investors want to make their own investment decisions, and even those want some money management when their assets rise over $100,000,” says Geoff Bobroff, president of Bobroff Consulting in East Greenwich, R.I. “I don’t currently see this as something the mutual fund industry has to shudder about.”