A (Brief) History of Mutual Funds

Mutual funds date back to the 1800s, when English and Scottish investment trusts sold shares to investors. Funds arrived in the United States in 1924. They were growing in assets until the late 1920s, when the Great Depression derailed the financial markets and the economy.Stock prices plunged and so did mutual funds that held stocks. As was common in the stock market at that time, mutual funds were leveraging their investments — leveraging is a fancy way of saying that they put up only, for example, 25 cents on the dollar for investments they actually owned. The other 75 cents was borrowed. That’s why, when the stock market plunged in 1929, some investors and fund shareholders got clobbered. They were losing money on their investments and on all the borrowed money. But, like the rest of the country, mutual funds,although bruised, pulled through this economic calamity. The Securities Act of 1933 and the Investment Company Act of 1940 established ground rules and oversight of the fund industry by the Securities and Exchange Commission (SEC). Among other benefits, this landmark federal legislation required funds to register and have those materials be reviewed by the SEC before issuing or selling any fund shares to the public. Funds were required to disclose cost, risk, and other information in a uniform format through a legal document called a prospectus During the 1940s, ’50s, and ’60s, funds grew at a fairly high and constant rate. From less than $1 billion in assets in 1940, fund assets grew to more than $50 billion by the late ’60s — more than a fiftyfold increase. Before the early ’70s, funds focused largely on investing in stocks. Since then, however, money market mutual funds and bond mutual funds have mushroomed. They now account for about 50 percent of all mutual fund assets. Today, thousands of mutual funds manage about $11 trillion.

Mutual funds can produce a much better rate of return over the long haul than a dreary, boring bank or insurance company account. You can purchase by writing a check or calling a toll-free number. What does it cost to hire such high-powered talent to do all the dreadful research and analysis? A mere pittance if you pick the right funds. In fact, when you invest your money in an efficiently managed mutual fund, the cost should be less than it would be to trade individual securities on your own. ✓ Mutual funds manage money efficiently through effective use of technology. Innovations in information-management tools enable funds to monitor and manage billions of dollars from millions of 

investors at a very low cost. In general, moving around $5 billion in securities doesn’t cost them much more than moving $500 million. Larger investments just mean a few more zeros in the computer data banks.

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