Origins of Mutual Funds
Mutual funds as an investment vehicle are becoming popular by the day among both seasoned and newbie investors. Mutual funds are diversified in nature and, therefore, offer a lower risk of loss. This has paved the way for many people to involve themselves in the open market. The mutual fund of today is a little bit different from the ancient one; thanks to the combination of several investment models.
It is not very clear when the mutual fund was developed. However, there are stories that began in Europe and spread to the rest of the world. They give a rough idea. The most popular one is that of a Dutch merchant called Adriaan Van Ketwich. In 1774, he came up with the idea of getting modest investors to create a pool of investments. He began the Eendragt Magt (translates to “unity creates strength”).
Unity Creates Strength offered small-time investors the opportunity to own a part of a diversified fund that consisted of income from securities and bonds. According to a number of experts, this was the first closed-end fund. Some see Ketwich as a hero because his idea came at a time when it was needed the most—the European financial market was troubled.
To manage the risks of the fund, the investments were spread out to Southern and Central America, Russia, Sweden, Spain, Germany, Denmark and Austria. In 1775, the shares were open to Amsterdam. Two managers were responsible for making decisions concerning the portfolio’s composition. The Unity Creates Strength fund was liquidated in 1824.
Mr. Van Ketwich’s model inspired other groups. One of the groups that came up after this was the Voordeelig en Voorsigtig (translates to “profitable and prudent”). This one was started by bankers from Utretch, a Dutch town.
Following the success of Unity, Mr. Van Ketwich created a second fund in 1779, Concordia Res Parvae Crescunt (translates to “small matters grow by consent”). It was different from Unity in that, portfolio managers were not limited to a list of securities that the fund was supposed to be made of. Managers had a little freedom to be flexible. This fund was successful and investors received 87% of their initial investment when it was dissolved in 1893. In the 19th century, funds like the Small Matter began sprouting all over.
London’s first official investment fund was founded in the Foreign and Colonial Government Trust in 1868.
The first investment fund for the U.S.A was called Boston Personality Property and was founded in 1893.
The structure of the modern-day mutual trust began developing in the ‘20s. The Massachusetts Investor Trust is probably the most notable one. It was an open end capitalization fund, the first of its kind, and gave investors the freedom to buy back shares at the end of the day.
Mutual funds mushroomed in America from the ‘50s to the ‘80s. That was when the index fund was formed. The first one was created in 1971 by John McQuown and William Fouse. John Bogle created a more refined index fund in 1971. It is during this period, also, that the first reserve funds, money market fund and index investment trust were created.