A Brief History of Mutual Funds

Mutual funds date back to the 1800s, when English and Scottish investment trusts sold shares to investors. Funds arrived in the United States (U.S.) in 1924. They were growing in assets until the late 1920s, when the Great Depression derailed the financial markets and the economy. Stock prices plunged and so did mutual funds that held stocks.

As was common in the stock market at that time, mutual funds were leveraging their investments — leveraging is a fancy way of saying that they put up only, for example, 25 cents on the dollar for investments they actually owned. The other 75 cents was borrowed. That’s why, when the stock market plunged in 1929, some investors and fund shareholders got clobbered. They were losing money on their investments and on all the borrowed money. But, like the rest of the country, mutual funds, although bruised, pulled through this economic calamity.

In 1940, the Investment Company Act established ground rules and oversight of the fund industry by the Securities and Exchange Commission (SEC). Among other benefits, this landmark federal legislation required funds to gain approval from the SEC before issuing or selling any fund shares to the public. Over time, this legislation has been strengthened by requiring funds to disclose cost, risk, and other information in a uniform format through a legal document called a prospectus.

During the 1940s, ’50s, and ’60s, funds grew at a fairly high and constant rate. From less than $1 billion in assets in 1940, fund assets grew to more than $50 billion by the late ’60s — more than a fiftyfold increase. Before the early ’70s, funds focused largely on investing in stocks.

Since then, however, money market mutual funds and bond mutual funds have mushroomed. They now account for about 40 percent of all mutual fund assets.

Today, thousands of mutual funds manage about $11 trillion.