Mutual funds turn 100: How a door-to-door salesman invented this investment instrument

‘Mutual funds are subject to market risk’ is a popular tagline we all know. For many, it may be the only thing we understand about mutual funds. But the investment instrument has come a long way. Today (21 March) marks the 100th year since the first open-ended mutual fund was invented and sold to the public.

As mutual funds turn 100, let’s take a deep dive into these investment funds and their history.

Mutual funds, explained

A mutual fund is a professionally-managed investment scheme, made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.

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To simplify it further, a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the fund’s gains, losses, income and expenses.

According to finance pundits, mutual funds offer an investor instant diversification as they invest in a collection of companies, thus lowering their risk too. This investment instrument also gives small or individual investors access to professionally managed portfolios of equities, bonds and other securities.

Mutual funds differ from country to country. A mutual fund based in Europe falls under different regulatory rules than a fund in India. Each country has its own rules for how a mutual fund is constructed, and it’s important to understand how these regulations shape the funds from each country. For instance, in India, all mutual funds are registered with SEBI, whereas in the US, they are registered with the Securities and Exchange Commission (SEC) and subject to SEC regulation.

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History of mutual funds

While mutual funds are seeing a rapid growth, it’s interesting to note their humble history. It is reported that the earliest concept of a mutual fund dates back to the late 1700s in Europe when a Dutch merchant and broker invited subscriptions from investors to form a trust to allow small investors with limited means to participate in larger investments.

However, it was in 1924 that the world saw its first open-end fund in Boston, in the US. Edward Leffler, a former salesman of aluminium pots and pans, is credited with creating an open-ended mutual fund, allowing retail customers to buy into a diversified portfolio of stocks. Leffler also wanted shareholders to be able to sell their shares back to the fund for a fair price, which was not the case for closed-end funds.

And it was through his efforts that on 21 March 1924, started the first mutual fund, Massachusetts Investors Trust. Soon others such as State Street, Wellington and Capital Group began their own mutual funds.

In 1929, the US saw the launch of the Wellington Fund, which was the first balanced fund, including both stocks and bonds. The Vanguard Wellington Fund (VWELX) is still in existence today and claims to be America’s oldest balanced fund.

In 1940, mutual funds received a stamp of approval from the US Congress through the Investment Company Act. This legislation helped define and regulate mutual funds and closed-end funds, as well as hedge funds, private equity funds, and holding companies.

In the ’50s, mutual funds became mainstream in the US and in the ’80s, as per a Financial Times report, big companies started offering to match their workers’ contributions to a slate of mutual funds inside a tax-advantaged retirement plan, usually known as a 401(k) after the relevant section of the tax code.

Today, mutual funds in the US continue to be popular. A Financial Times report states that mutual funds manage nearly $20 trillion in US assets. More than half of all American households and 116 million of the country’s 333 million residents hold shares in at least one mutual fund. Carol Geremia, president of MFS, Leffler’s old company, told the British daily, “There’s a huge, huge population in America that loves the mutual fund for its simplicity. We don’t need all of this over-engineered stuff when you think of 30 years and somebody’s retirement. It’s an amazing vehicle that still does that job.”

Mutual funds in India

While mutual funds began in the US in 1924, it started in India years later in 1963 with the formation of Unit Trust of India (UTI) at the initiative of the Reserve Bank of India (RBI) and the Government of India. The objective then was to attract small investors and introduce them to market investments.

The mutual fund industry has expanded considerably over the past few years. In early days, UTI dominated the market in the nation, but in recent years, the industry has experienced substantial growth. At the end of 2023, the industry’s total assets under management (AUM) breached the Rs 50-lakh crore mark for the first time.

And according to Axis Capital, the industry is expected to become Rs 100 lakh crore in valuation by 2030.

Competition to mutual funds

But today, mutual funds are also facing a challenge from newer investment instruments, such as exchange-traded funds (ETF). ETFs are like mutual funds on speed, report the Financial Times, explaining that instead pricing the pooled assets once a day, as mutual funds do, ETFs trade continuously on exchanges as stocks do.

John Rekenthaler, who has been tracking mutual funds for Morningstar since the 1980s told Financial Times, “I don’t see what a mutual fund can do better than [an] ETF… It’s a better mousetrap… Eventually the mutual fund is dead.”

But the end is not here as of now and the mutual fund can enjoy the fact that it’s turned 100 and also democratised investing along the way.

With inputs from agencies