Mutual Funds – An Introduction and Brief History

Each of us do not have the skills or the time to build and manage a portfolio of investments. There is an excellent alternative available-mutual funds.

A mutual fund is an investment intermediary through which people can save their money and invest according to a predetermined target.

Each fund investor enjoys a part of the pool proportionate to the initial investment it makes. The capital of the mutual fund is divided into shares or units and investors to receive a number of units in proportion to their investment.

The investment objective of the fund is always decided in advance. Mutual funds investing in bonds, stocks, money market instruments, real estate, commodities or other investments or several times a combination of these body.

Details of the use of funds policies, objectives, charges, etc. are all services available in the fund's prospectus and each investor should go through the prospectus before investing in a mutual fund.

Investment decisions for the pool of capital are made by a fund manager (or managers). The fund manager decides that the securities must be bought and how much.

The value of the units varies with a change in the total value of investments made by the mutual fund.

The value of each share or unit of the fund is called NAV (Net Asset Value).

Different funds have different risk profile and compensation. A mutual fund that invests in stocks is a higher risk investment in a mutual fund which invests in government bonds. The value of stocks can go down, resulting in a loss for investors, but the money invested in bonds is safe (unless the government default – which is rare). At the same time, the biggest risk in equities also presents an opportunity for higher returns. Stocks are up to a limit, but the yields of government bonds are limited to the interest rate offered by the government.

History of Mutual Funds:

The first “pooling of money for investment has been achieved in 1774. After the 1772-1773 financial crisis, a trader Dutch Adriaan Van Ketwich invited investors to come together as a trust. The aim of the trust is to reduce the risks associated with the diversification of the investment by providing retail investors. The funds invested in various European countries such as Austria, Denmark and Spain. The investments are mainly in bonds and equity formed a small part. The trust was names Eendragt Maakt Magt, which means “Unity Creates Resistance.”

The fund has attracted many features that investors:

-He boarded a lottery.
– There was a guaranteed 4% dividend, which is slightly lower than the average rates prevailing at the time. Thus, the interest income has exceeded the required payments and the difference was converted to a cash reserve.
– The cash reserve has been used to retire each year some shares at 10% premium, and therefore the remaining shares received a higher interest. Thus, the cash reserve has continued to increase over time-more acceleration share redemption.
– Confidence should be dissolved at the end of 25 years, and the capital was to be divided among the other investors.

However, a war with England have led to many bonds in default. Because of the decrease in investment income, share buyback was suspended in 1782 and, later, interest payments have been reduced. The fund is more attractive to investors and disappeared.

After developments in Europe in recent years, the idea of 38 c3 E mutual funds has reached the United States if at the end of the nineteenth century. In the year 1893, the first closed-end fund has been established. She was dubbed “The Boston Personal Property Trust.”

Alexander Fund in Philadelphia was the first step towards the open end funds. It was established in 1907 and has new questions every six months. Investors were allowed to make takeovers.

The first open-end fund was Massachusetts Investors' Trust in Boston. Formed in the year 1924, it went public in 1928. 1928 also saw the emergence of the first balanced fund-Wellington Fund, which had invested in both stocks and bonds.

The concept of index-based funds has been given by William Fouse and John McQuown of Wells Fargo Bank in 1971. Based on their concept, John Bogle launched the first retail Index Fund in 1976. It was called the First Index Investment Trust. It is now known as the Vanguard 500 Index Fund. He crossed $ 100 billion in assets in November 2000 and has become the world's largest fund.

Today, mutual funds have come a long way. Nearly half of households in the United States invests in mutual funds. The popularity of mutual funds is also soaring in developing economies like India. They have become the best way for the investment of many investors who value the unique combination of diversification, low cost and simplicity provided by the fund.

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