MBA (Finance)III – Semester, Merchant Banking and Financial Services, Unit 4.1
Define Mutual Fund
According to Association of Mutual Funds in India (AMFI), “A Mutual fund is a trust that pools number of savings investors, who shares common financial goal’. From the aforesaid definition, we can understand the concept of Mutual fund and the key points as mentioned hereunder:-
Mutual Fund
According to Association of Mutual Funds in India (AMFI),
“A Mutual fund is a trust that pools
number of savings investors, who shares common financial goal’. From the
aforesaid definition, we can understand the
concept of Mutual fund and the key points as mentioned hereunder:-
Mutual fund is a trust
Mutual fund pools money from a group of investors called Unit
Holders
Invest the money, collected from small investors into securities
(shares, bonds etc.,). It is called as diversified
investment.
Mutual Fund use professional expertise (investment management
skills) on investments made.
Asset classes of investments match the stated investment objectives
of the scheme
Incomes and Gains from the investments are passed on to the unit
holders based on the proportion of the number of units they own.
Origin
Even though Historians are uncertain of the origin of investment
funds, some say that the closed-end investment companies launched at
Netherlands in the year 1822 by the King William-I is the first mutual funds,
whereas some others say that Dutch merchant named Adriaan van Ketwich, whose
investment trust was created in the year 1774 might have given the idea to the
king. Ketwich probably theorized that diversification would increase the appeal
for investments to smaller investors with the minimal capital. The name of
Ketwich’s fund, Eendragt Maakt Magt,
means “unity creates strength”.
A further development of mutual funds was made in Switzerland in
the year 1849, and subsequently it was followed in Scotland in the 1880s in the
similar fashion. Consequent to the evolution of mutual fund rooted in Great
Britain and France, the idea of pooling resources and spreading risk using
closed-end investments, came to the United States in the year 1890s.
The first closed-end fund “Boston Personal Property Trust” was
formed in U.S in the year 1893. The modern mutual fund evolution developed in
the year 1970 in Philadelphia under the name Alexander Fund had special
features of semi-annual issues and facility for investors to withdraw their
investments on demand.
The Launching of the Modern
Fund
In the year 1924, the modern mutual fund was created in pursuance
of the formulation of the Massachusetts Investors’ Trust in Boston. Generation
of the mutual fund firm namely “MFS Investment Management” went public in the
year 1928”. The custodian of the Massachusetts Investors’ Trust was State
Street Investors. However, State Street Investors started generating their own
fund at the helm in the year 1924 with Richard Paine, Richard Saltonstall and
Paul Cabot. It is also pertinent to note that Saltonstall was also associated
with Scudder, Stevens and Clark. In view of the said setup the first no-load
fund was launched in the year 1928. Instantaneously, the first new launch of
Wellington Mutual Fund emerged to include stocks and bonds, as opposed to
direct merchant bank style of investments in business and trade.
Regulation and Development of
Mutual Funds
open-ended mutual funds and nearly 700 closed-end funds existed
before the stock market crash of 1929. Due to that crash, closed-end funds were
wiped out. Small open-end funds managed to survive. To protect the investors,
Government regulators created the Securities
and Exchange Commission (SEC). It
paved way to enact the Securities
Exchange Act of 1934. As a result, mutual funds must register with the SEC and to reveal it in its
prospectus.
The mutual fund industry grew-up gradually during 1950s with 100
top open-end funds. And in addition to that, 50 new funds emerged during the
decade. Hundreds of new funds were launched during the decade of 1960s, which
had aggressive growth till the bear market condition of 1969. The first index
fund concept was established in the year 1971 by William Fouse and John McQuown
of Wells Fargo Bank. The mutual fund industry further flourished due to the
impact of Low-cost index fund and the rise of no-load fund.
The assets and household ownership of mutual funds experienced
rapid growth simultaneously in United States also. On account of increasing
globalization of finance, expanding presence of large multinational financial
groups and strong performance of equity and bond markets, the global growth of
mutual funds boosted during 1990s.
