Mutual funds have become a popular investment vehicle for first-time and seasoned investors alike. Its diversified nature that provides lower risk of loss has opened up a way for pools of people to participate in the open market. The modern-day mutual fund has more variety and structure that some suggest is a result of combining several investment models that have been created globally in different periods of time.
The beginnings of the mutual funds can be traced back to several stories that originated in Europe and later spread across the globe. The most popular story is of Dutch Merchant Adriaan Van Ketwich, who, in 1774, had the idea of pooling investments from modest investors. He created the Eendragt Magt that translates to “Unity Creates strength”.
Through “Unity Creates Strength” small-time investors could own a portion of a diversified fund consisting of bonds and income generated from plantations, mortgages and other securities. Many consider this the first closed-end fund. Others have praised Ketwich as the creation of the fund came at a tense and troubled time in the European financial market.
The fund’s risks were managed by spreading out investments to Austria, Denmark, Germany, Spain, Sweden, Russia and Central and Southern America. In 1775, the Unity Creates Strength shares were made open to Amsterdam. The portfolio was then managed by two directors who made decisions regarding the composition of the portfolio. This fund was liquidated in 1824.
The model that Mr. Van Ketwich created inspired other groups to follow. An example of this was the Voordeelig en Voorsigtig, which translates to “profitable and prudent,” a fund that was created by bankers from the Dutch town of Utrecht.
In 1779, after the success of Unity, Adriann Van Ketwich went on to create a second fund called Concordia Res Parvae Crescunt, which translates to “Small Matters Grow by Consent.” Unlike Mr. Van Ketwich’s first fund, Small Matters Grow by Consent did not limit portfolio managers decision with a list of securities that should comprise the fund. The new model gave more room for the managers to play around with. The fund managers set their eyes on solid securities and were wary of funds whose values were unstable. The fund was dissolved in 1893 and in 1894 the investors got paid 87% of their original investment. Funds that featured the same dynamics began sprouting in the 19th century in England, Switzerland, Scotland, Great Britain France and even the United States of America
London found its first official investment fund in 1868 in the Foreign and Colonial Government Trust, an investment that is still being traded today.
The United States of America in 1893 saw its first investment trust structure called the Boston Personal Property Trust which is also considered as the first closed-end fund in the country.
The 1920s brought the makings of the modern-day mutual trust. The most notable was the Massachusetts Investor Trust of March 21, 1924. This fund was the first open end capitalization fund that allowed its investors to buy back their shares at the end of every business day. There was a continuous issue of redemption and shares. In 1928, it went public and became known as MFS Investment Management.
From the 1950s to the 1980s, America saw the rise of mutual funds. It was during this period that the index fund was created. In 1971, the first index fund was created by William Fouse and John McQuown of Wells Fargo. Then the more refined index fund was created by John Bogle in 1974 that offered stocks to retailers. This period also saw the creation of the first index investment trust, money market fund and reserve funds.
As the 1990s set in, the industry also saw the rise of fund managers like Peter Lynch and Bill Miller. Apart from the rise of varied investment options, countries started to establish regulating bodies and guidelines to protect people going into open trade. In the United States of America, this period saw the establishment of the Securities and Exchange Commission.