MUTUAL FUNDS

THE BASICS

What is a "mutual fund"?

A mutual fund is a professionally managed investment vehicle that pools funds from many investors and collectively invests them in stocks, bonds, cash instruments, commodities, other mutual funds, real estate, and many other types of investment instruments. A mutual fund enables its investors to gain (or lose) from the fund's performance.

How much money flowed into U.S. equity mutual funds and exchange traded funds in 2013?

According to experts at TrimTabs Investment Research in a report published in January 2014, a record $352 billion flowed into U.S.-listed equity mutual funds and ETFs in 2013, breaking the previous record inflow of $324 billion set in 2000.

What about the success of high-performing mutual funds?

Experts at Forbes magazine cite a 2003 study by mutual fund analysis company Morningstar that looked at a 20-year period beginning in 1976, analyzed the returns in five four-year periods, and compared the returns of the best 30 funds in each of those periods against the performance of those same funds over the next period. They found that the star funds did very well during the first period, averaging a return of 28.3%, but in the next period, not only did many of these same funds drop out entirely, but those that remained had returns of only 1.8%. This data is relatively easy to find.

When did mutual funds start?

Many believe the first mutual funds were organized in Northern Europe, specifically in the Netherlands, by King William I in 1822. Others cite 1774, when a Dutch merchant named Adriaan van Ketwich created Eendragt Maakt Magt, which means "unity creates strength." He may have influenced King William I to create his fund some years later. According to academic researchers at Yale University, Ketwich sought investors and invested primarily in bonds (debt) of such countries as Austria, Denmark, "German States", Spain, Sweden, Russia, and colonial plantations of Central and South America. Since very few "equities" existed on the Amsterdam Stock Exchange at the time, investors could only invest in bonds. The fund also held no Dutch bonds; in today's jargon, it would be called a "foreign bond mutual fund" or a "closed-ended trust." By 1775, most of the shares of this fund were freely traded on the Amsterdam exchange. Ketwich was not personally involved in the daily investment decisions of the fund, and only administratively managed the fund. The fund also guaranteed a 4% dividend to all shareholders, slightly lower than the nominal interest rate of the bonds in the portfolio. The fund lasted until 1782, when it was officially dissolved.

 
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