History of Mutual Funds

The first "pooling of money" for investments was done in 1774. After the 1772-1773 financial crisis, a Dutch merchant Adriaan van Ketwich invited investors to come together to form an investment trust. The goal of the trust was to lower risks involved in investing by providing diversification to the small investors. The funds invested in various European countries such as Austria, Denmark and Spain. The investments were mainly in bonds and equity formed a small portion. The trust was names Eendragt Maakt Magt, which meant "Unity Creates Strength".

The fund had many features that attracted investors:

It had an embedded lottery.

There was an assured 4% dividend, which was slightly less than the average rates prevalent at that time. Thus the interest income exceeded the required payouts and the difference was converted to a cash reserve. The cash reserve was utilized to retire a few shares annually at 10% premium and hence the remaining shares earned a higher interest. Thus the cash reserve kept increasing over time - further accelerating share redemption.

The trust was to be dissolved at the end of 25 years and the capital was to be divided among the remaining investors. However a war with England led to many bonds defaulting. Due to the decrease in investment income, share redemption was suspended in 1782 and later the interest payments were lowered too. The fund was no longer attractive for investors and faded away.

After evolving in Europe for a few years, the idea of mutual funds reached the US at the end if nineteenth century. In the year 1893, the first closed-end fund was formed. It was named the "The Boston Personal Property Trust."

The Alexander Fund in Philadelphia was the first step towards open-end funds. It was established in 1907 and had new issues every six months. Investors were allowed to make redemptions.

The first true open-end fund was the Massachusetts Investors' Trust of Boston. Formed in the year 1924, it went public in 1928. 1928 also saw the emergence of first balanced fund - The Wellington Fund that invested in both stocks and bonds.

The concept of Index based funds was given by William Fouse and John McQuown of the Wells Fargo Bank in 1971. Based on their concept, John Bogle launched the first retail Index Fund in 1976. It was called the First Index Investment Trust. It is now known as the Vanguard 500 Index Fund. It crossed 100 billion dollars in assets in November 2000 and became the World's largest fund.

Today mutual funds have come a long way. Nearly one in two households in the US invests in mutual funds. The popularity of mutual funds is also soaring in developing economies like India. They have become the preferred investment route for many investors, who value the unique combination of diversification, low costs and simplicity provided by the funds.

Mutual funds are one of the best ways for you, as an individual investor, to invest in stocks, bonds, real estate, precious metals, commodities and cash. Yes, cash too, through money market mutual funds. You'll find this section to be an excellent introduction to mutual funds.

Mutual funds offer some very compelling benefits that make them an ideal investment vehicle for any individual investor. Even some institutional investors make use of these investment vehicles. Given their credentials, what these professional investors know about mutual funds should carry considerable weight in your evaluation of these investment vehicles. The same features that make mutual funds appealing to institutional investors will serve you well, too.

Mutual funds provide the following benefits:

Automatic diversification at various levels. Access to financial markets worldwide. Access to all major asset classes. A broad selection of fund types. A diversity of investing styles. Professional management.

Elimination of the need for individuals to perform detailed and ongoing securities analysis. The option of making automatic investments and withdrawals. Many funds can be purchased with small initial and subsequent investments. No transaction fees, if you pick the right place to open your account. No sales commissions if you choose no load mutual funds or invest through a retirement plan.