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