A Brief History of Mutual Funds

Brief History of Mutual Funds in India

A brief history of mutual funds is not about any history classes, mutual funds getting so famous these days, will know here how it started. Each one of us does not have the expertise in the stock market or the time to build and manage an investment portfolio. For that there are these mutual funds are available as an excellent alternative.

Table of Contents

Mutual Fund

A mutual fund is an investment mediator by which individuals can pool their money and invest it according to a predetermined objective.

Each investor of the mutual fund gets a share of the pool proportional to the initial investment that he pushes. The capital of the mutual fund is divided into shares or units and investors get a number of units proportional to their investment.

Mutual Fund Objective

The investment objective of the mutual fund is always decided early before investment. Mutual funds invest in bonds, stocks, money-market instruments, real estate, commodities or other investments or many times a variety of any of these to balance the risk factor.

The details concerning the funds’ policies, objectives, charges, services etc are all obtainable in the fund’s prospectus and every investor should go through the prospectus before investing in any mutual fund.

The investment judgments for the pool capital are made by a fund manager (or managers). The fund manager decides what securities, stocks, bonds etc are to be bought and in what quantity. 

The value of units changes with the change in the aggregate value of the investments made by the mutual fund houses.

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

Different funds have different risk-reward profiles according to their sectors. A mutual fund that invests in stocks is a more prominent risk investment than a mutual fund that invests in government bonds or any other bonds. 

The value of stocks can go down resulting in a failure for the investor, but money invested in bonds is secure(unless the Government defaults– which is rare.) At the same time, the greater risk in stocks also presents a possibility for higher returns. Stocks can go up to any limitation, but returns from government bonds are restricted to the interest rate offered by the government.

History of Mutual Funds

The first “pooling of money” for asset acquisitions was done in 1774. After the 1772-1773 financial crisis, a Dutch merchant Adriaan van Ketwich invited many investors to come together to form an investment trust like a mutual fund. The goal of the trust was to lower the risks involved in investing by supplying diversification to small investors. 

The funds are invested in different European countries such as Austria, Denmark and Spain. The investments were mainly in bonds and equity included a small portion. The trust was named Eendragt Maakt Magt, which meant “Unity Creates Strength”. 

The trust fund had many features that attracted investors:

  • It has an embedded lottery chance to win.
  • There was a secure 4% dividend, which was slightly less than the average rates prevailing at that time. Thus the interest income exceeded the needed payouts and the difference was converted to a cash reserve.
  • The cash reserve was utilised to retire periodic shares annually at a 10% premium and hence the remaining shares gained a higher interest. Thus the cash reserve kept growing over time – additionally accelerating share redemption.
  • The trust fund was to be dissolved at the end of 25 years and the capital was to be divided among the remaining fund investors.

However, a war at that period with England led to many bonds defaulting. Due to the decline in investment income, share redemption was suspended in 1782 and thereafter the interest payments were lowered too. The fund was no longer appealing to investors and faded away.

After developing in Europe for a few years, the idea of mutual funds reached the US at the end of the nineteenth century. In the year 1893, the first closed-end fund was started. It was described as “The Boston Personal Property Trust.”

The Alexander Fund in Philadelphia was the first step toward open-end funds. It was founded in 1907 and had new problems every six months. Fund Investors were allowed to make redemptions.

The first real open-end fund was the Massachusetts Investors’ Trust of Boston. Starting in the year 1924, it went public in 1928. 1928 also witnessed the emergence of the first balanced fund – The Wellington Fund which invested in both stocks and bonds.

The idea of Index-based funds was given by William Fouse and John McQuown of the Wells Fargo Bank in 1971. Based on their vision, John Bogle launched the first retail Index Fund in 1976. It was named the First Index Investment Trust. It is currently known as the Vanguard 500 Index Fund

History of mutual funds in India

The Mutual Fund initiative in India started in 1963 with the formation of UTI (Unit Trust of India) 1963 by an Act of Parliament and functioned under the Regulatory and administrative control of the RBI (Reserve Bank of India). In 1978, UTI (Unit Trust of India) was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. Unit Scheme 1964 (US ’64) was the first scheme plan launched by UTI. At the end of 1988, UTI (Unit Trust of India) had ₹ 6,700 crores of Assets Under Management (AUM).

Since May 2014, the Industry has noticed steady inflows and increases in the AUM as well as the number of investor folios (accounts).

The Industry’s AUM crossed the landmark of ₹10 Trillion (₹10 Lakh Crore) for the first time on 31st May 2014 and in a short term span of about three years the AUM (Assets Under Management) size had grown more than two folds and crossed ₹ 20 trillion (₹20 Lakh Crore) for the first time in August 2017. The AUM (Assets Under Management) size crossed ₹ 30 trillion (₹30 Lakh Crore) for the first time in November 2020.

On average 12.35 lakh, new folios (accounts) are added every month in the last 5 years since March 2017.

The growth in the size of the industry has been feasible due to the twin effects of the regulatory benchmarks taken by SEBI in re-energising the MF Industry in September 2012 and the backing from mutual fund distributors in expanding the retail base.

In this modern area, mutual funds have come a prolonged way. Probably, two households in the US invest in mutual funds. The popularity of mutual funds is also flying in developing economies like India, and China. They have become the preferred investment avenue for many investors, who value the exceptional combination of diversification, low costs and clarity provided by the funds.

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