| Each one of us does not have the expertise or | | | | Eendragt Maakt Magt, which meant “Unity |
| the time to build and manage an investment | | | | Creates Strength”. |
| portfolio. There is an excellent alternative available | | | | The fund had many features that attracted |
| – mutual funds. | | | | investors: |
| A mutual fund is an investment intermediary by | | | | - It had an embedded lottery. - There was an |
| which people can pool their money and invest it | | | | assured 4% dividend, which was slightly less than |
| according to a predetermined objective. | | | | the average rates prevalent at that time. Thus |
| Each investor of the mutual fund gets a share of | | | | the interest income exceeded the required |
| the pool proportionate to the initial investment | | | | payouts and the difference was converted to a |
| that he makes. The capital of the mutual fund is | | | | cash reserve. - The cash reserve was utilized to |
| divided into shares or units and investors get a | | | | retire a few shares annually at 10% premium and |
| number of units proportionate to their investment. | | | | hence the remaining shares earned a higher |
| The investment objective of the mutual fund is | | | | interest. Thus the cash reserve kept increasing |
| always decided beforehand. Mutual funds invest in | | | | over time – further accelerating share |
| bonds, stocks, money-market instruments, real | | | | redemption. - The trust was to be dissolved at |
| estate, commodities or other investments or | | | | the end of 25 years and the capital was to be |
| many times a combination of any of these. | | | | divided among the remaining investors. |
| The details regarding the funds’ policies, | | | | However a war with England led to many bonds |
| objectives, charges, services etc are all available in | | | | defaulting. Due to the decrease in investment |
| the fund’s prospectus and every investor | | | | income, share redemption was suspended in 1782 |
| should go through the prospectus before investing | | | | and later the interest payments were lowered |
| in a mutual fund. | | | | too. The fund was no longer attractive for |
| The investment decisions for the pool capital are | | | | investors and faded away. |
| made by a fund manager (or managers). The | | | | After evolving in Europe for a few years, the idea |
| fund manager decides what securities are to be | | | | of mutual funds reached the US at the end if |
| bought and in what quantity. | | | | nineteenth century. In the year 1893, the first |
| The value of units changes with change in | | | | closed-end fund was formed. It was named the |
| aggregate value of the investments made by the | | | | “The Boston Personal Property Trust.” |
| mutual fund. | | | | The Alexander Fund in Philadelphia was the first |
| The value of each share or unit of the mutual | | | | step towards open-end funds. It was established |
| fund is called NAV (Net Asset Value). | | | | in 1907 and had new issues every six months. |
| Different funds have different risk – reward | | | | Investors were allowed to make redemptions. |
| profile. A mutual fund that invests in stocks is a | | | | The first true open-end fund was the |
| greater risk investment than a mutual fund that | | | | Massachusetts Investors’ Trust of Boston. |
| invests in government bonds. The value of stocks | | | | Formed in the year 1924, it went public in 1928. |
| can go down resulting in a loss for the investor, | | | | 1928 also saw the emergence of first balanced |
| but money invested in bonds is safe (unless the | | | | fund – The Wellington Fund that invested in |
| Government defaults – which is rare.) At the | | | | both stocks and bonds. |
| same time the greater risk in stocks also | | | | The concept of Index based funds was given by |
| presents an opportunity for higher returns. Stocks | | | | William Fouse and John McQuown of the Wells |
| can go up to any limit, but returns from | | | | Fargo Bank in 1971. Based on their concept, John |
| government bonds are limited to the interest rate | | | | Bogle launched the first retail Index Fund in 1976. |
| offered by the government. | | | | It was called the First Index Investment Trust. It |
| History of Mutual Funds: | | | | is now known as the Vanguard 500 Index Fund. It |
| The first “pooling of money” for | | | | crossed 100 billion dollars in assets in November |
| investments was done in 1774. After the | | | | 2000 and became the World’s largest fund. |
| 1772-1773 financial crisis, a Dutch merchant | | | | Today mutual funds have come a long way. |
| Adriaan van Ketwich invited investors to come | | | | Nearly one in two households in the US invests in |
| together to form an investment trust. The goal | | | | mutual funds. The popularity of mutual funds is |
| of the trust was to lower risks involved in | | | | also soaring in developing economies like India. |
| investing by providing diversification to the small | | | | They have become the preferred investment |
| investors. The funds invested in various European | | | | route for many investors, who value the unique |
| countries such as Austria, Denmark and Spain. | | | | combination of diversification, low costs and |
| The investments were mainly in bonds and equity | | | | simplicity provided by the funds. |
| formed a small portion. The trust was names | | | | |