Each of us does not have the experience or the time to build and manage an investment portfolio. There is an excellent alternative available: mutual funds.

A mutual fund is an investment intermediary through which people can pool their money and invest it according to a predetermined objective.

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

The investment objective of the mutual fund is always decided in advance. Mutual funds invest in bonds, stocks, money market instruments, real estate, commodities, or other investments, or often a combination of any of these.

Details about policies, goals, charges, services, etc. of the funds are available in the fund’s prospectus and each investor should review the prospectus before investing in a mutual fund.

Investment decisions for common equity are made by a fund manager (or managers). The fund manager decides which securities are to be purchased and in what quantity.

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

The value of each share or unit of the mutual fund is called NAV (net asset value).

Different funds have a different risk-reward profile. A mutual fund that invests in stocks is a higher risk investment than a mutual fund that invests in government bonds. The value of the shares can go down resulting in a loss for the investor, but the money invested in bonds is safe (unless the government defaults, which is rare). At the same time, the higher risk in stocks also presents an opportunity for higher returns. Stocks can go to any limit, but government bond yields are limited to the interest rate offered by the government.

History of mutual funds:

The first “money pooling” for investment took place in 1774. After the financial crisis of 1772-1773, a Dutch merchant Adriaan van Ketwich invited investors to join together to form an investment trust. The objective of the trust was to reduce the risks involved in investing by providing diversification to small investors. The funds invested in various European countries such as Austria, Denmark and Spain. Investments were made mainly in bonds and stocks made up a small part. The trust was called Eendragt Maakt Magt, which meant “Unity creates strength.”

The fund had many characteristics that attracted investors:

– It had an embedded lottery.

– There was an assured dividend of 4%, which was slightly lower than the average rates prevailing at that time. Therefore, the interest income exceeded the required payments and the difference became a cash reserve.

– The cash reserve was used to withdraw some shares annually with a 10% premium and therefore the remaining shares earned a higher interest. Therefore, the cash reserve continued to increase over time, further accelerating the equity redemption.

– The trust would be dissolved after 25 years and the capital would be divided among the remaining investors.

However, a war with England caused many bonds to default. Due to declining investment income, the stock redemption was suspended in 1782 and then interest payments were also reduced. The fund was no longer attractive to investors and faded.

After evolving in Europe for a few years, the idea of ​​mutual funds came to the United States in the late 1800s. In 1893 the first fixed capital fund was formed. It was named the “Boston Personal Property Trust.”

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

The first truly open fund was the Massachusetts Investors’ Trust in Boston. Formed in 1924, it became public in 1928. The first balanced fund also emerged in 1928: the Wellington Fund, which invested in both stocks and bonds.

The concept of index-based funds was given by William Fouse and John McQuown of Wells Fargo Bank in 1971. Based on their concept, John Bogle launched the first retail index fund in 1976. It was called the first index investment fund. It is now known as the Vanguard 500 Index Fund. It crossed $ 100 billion in assets in November 2000 and became the largest fund in the world.

Today mutual funds have come a long way. Nearly one in two households in the US invests in mutual funds. The popularity of mutual funds is also increasing in developing economies like India. They have become the investment route of choice for many investors, who value the unique combination of diversification, low costs, and simplicity that the funds provide.