Today the choice of possible investment opportunities is so varied that it can become overwhelming to a prospective investor. There are shares, bonds, commodities, securities, property – to mention just a few.
Mutual funds (also known as managed funds) have become a popular choice among investors. This is because you are able to invest in many different assets with just one investment vehicle. This is done by pooling your funds with other investors to make one large investment.
In America the first modern mutual fund, the Massachusetts Investors Trust, was started in 1924. Some people think that mutual funds started in America but it may surprise them to know that the idea of a group of investors pooling their money together goes back even further.
In fact, evidence of this type of investing can be traced back to Europe, dating back to the 1800s. King William 1 of the Netherlands was credited with starting such a fund in 1822 and yet some even say that the King got the idea from a Dutch merchant named Adriaan van Ketwich whose investment trust was created in 1774. Similar pooled fund investment vehicles were started in Switzerland in mid 1849, followed by Scotland in the 1880s. Great Britain and France adopted this style of investing and the idea made its way to the US in the 1890s.
The first group in the United States to invest in this way were the staff and faculty at Harvard University in 1893. It was their group investment that went on to become the first mutual fund in US history. The fund, which had started with 200 investors and $50,000 dollars, grew in value to nearly $400,000 in only one year. As you can see this first US mutual fund was unbelievably successful.
Today there are approximately 10,000 different mutual funds available in the United States. This represents approximately 83 million investors and makes mutual funds one of the most popular forms of investing in the US.
The rules of investing in mutual funds changed significantly after the great stock market crash of 1929. The Securities & Exchange Commission (SEC) was born, and two key pieces of legislation, the Securities Act of 1933 and the Securities Exchange Act of 1934 were passed by Congress. The SEC helped create the Companies Act of 1940 and now require companies to file their financial information and provide disclosure to investors in the form of a prospectus. This means that investors are now able to see which companies are healthy, and which companies they should avoid.
In the US the creation of the SEC did wonders for consumer confidence, and by the 1960’s the mutual fund market was showing massive growth with about 270 different mutual funds. The bear market of 1969 caused a cooling off period but growth in the industry later resumed.
The history of mutual funds in Australia and New Zealand is more recent. In this part of the world they are more commonly known as managed funds or unit trusts. Australia has had managed funds since the second world war whereas New Zealand’s Unit Trust Act of 1960 signified a change of heart by the Capital Issues Committee who until then were blocking attempts to introduce the concept of this style of investment.
With new taxation rules positively affecting many unit trusts in New Zealand this type of investment vehicle will only become more popular. The Portfolio Investment Entity (PIE) regime which started on 1 October 2007 will mean a more effective taxation rate, particularly for those in the highest tax bracket. It will even make it more tax effective than investing directly into any of the asset classes. This is good news for investors in managed funds in New Zealand.
Mutual fund investing has had its ups and downs but still remains a great way to diversify, particularly for investors with smaller sums of money. It is all a matter of choosing your fund wisely taking into account your time horizon, risk tolerance and keeping your investment goals in mind. Mutual funds will around for many more years to come.