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Mutual Funds - An Introduction and Brief History

Each one of us does not have theequity formed a small portion. The trust
expertise or the time to build andwas names Eendragt Maakt Magt, which
manage an investment portfolio. There ismeant "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 awhich was slightly less than the average
predetermined objective.rates prevalent at that time. Thus the
Each investor of the mutual fund gets ainterest income exceeded the required
share of the pool proportionate to thepayouts and the difference was converted
initial investment that he makes. Theto a cash reserve.
capital of the mutual fund is divided- The cash reserve was utilized to
into shares or units and investors get aretire a few shares annually at 10%
number of units proportionate to theirpremium and hence the remaining shares
investment.earned a higher interest. Thus the cash
The investment objective of the mutualreserve 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 manybe 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, servicesbonds defaulting. Due to the decrease in
etc are all available in the fund'sinvestment income, share redemption was
prospectus and every investor should gosuspended in 1782 and later the interest
through the prospectus before investingpayments were lowered too. The fund was
in a mutual fund.no longer attractive for investors and
The investment decisions for the poolfaded away.
capital are made by a fund manager (orAfter evolving in Europe for a few
managers). The fund manager decides whatyears, the idea of mutual funds reached
securities are to be bought and in whatthe US at the end if nineteenth century.
quantity.In the year 1893, the first closed-end
The value of units changes with changefund was formed. It was named the "The
in aggregate value of the investmentsBoston Personal Property Trust."
made by the mutual fund.The Alexander Fund in Philadelphia was
The value of each share or unit of thethe first step towards open-end funds.
mutual fund is called NAV (Net AssetIt 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 thatThe first true open-end fund was the
invests in stocks is a greater riskMassachusetts Investors' Trust of
investment than a mutual fund thatBoston. Formed in the year 1924, it went
invests in government bonds. The valuepublic in 1928. 1928 also saw the
of stocks can go down resulting in aemergence of first balanced fund - The
loss for the investor, but moneyWellington Fund that invested in both
invested in bonds is safe (unless thestocks and bonds.
Government defaults - which is rare.) AtThe concept of Index based funds was
the same time the greater risk in stocksgiven by William Fouse and John McQuown
also presents an opportunity for higherof 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 arethe first retail Index Fund in 1976. It
limited to the interest rate offered bywas 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" fordollars in assets in November 2000 and
investments was done in 1774. After thebecame the World's largest fund.
1772-1773 financial crisis, a DutchToday mutual funds have come a long way.
merchant Adriaan van Ketwich invitedNearly one in two households in the US
investors to come together to form aninvests in mutual funds. The popularity
investment trust. The goal of the trustof mutual funds is also soaring in
was to lower risks involved in investingdeveloping economies like India. They
by providing diversification to thehave become the preferred investment
small investors. The funds invested inroute for many investors, who value the
various European countries such asunique combination of diversification,
Austria, Denmark and Spain. Thelow costs and simplicity provided by the
investments were mainly in bonds andfunds.



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