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