A:

On March 21,1924, the Massachusetts Investors Trust was incorporated, marking the birth of the American mutual fund industry. However, mutual funds existed long before their American debut. Mutual fund-style trusts were prevalent across Europe in the 1800s. In pre-1924 America, however, people wishing to invest were usually limited to putting it in a savings account because even bonds at the time had large initial investment restrictions.

The ability to pool money and invest like the Wall Street elites attracted droves of individual investors. There were already 100 mutual fund-style trusts by 1927 and it grew to over 700 by the peak of the market bubble in 1929. The crash of 1929 destroyed many of these trusts and their investors.

The crash led to public disclosure rules for mutual fund-style trusts as well as publicly traded companies. Industry leaders worked with government to make regulatory safeguards to restore investor confidence, culminating in the Investment Company Act of 1940. This act called for registration of all mutual funds and required them to make semi-annual reports to shareholders about the fund's financial status, portfolio holdings, compensation, and any changes in the portfolio. The funds were also given a corporate structure with a board of directors to perform certain management activities.

The law further restricted funds by limiting their margin buying. The heavily leveraged buying by trusts during the bubble had added to the severity of the crash, but fund managers insisted on being able to use some margin as a valid investment strategy. The eventual limits represented a compromise between the industry and the government. Following the introduction of the Act, the industry dropped the trust label in favor of mutual funds and sent out armies of salesmen to push funds in the postwar boom in the '40s and '50s. Mutual funds continually grew in popularity and quickly attracted more wealth than they ever had in the roaring '20s. Fund managers like T. Rowe Price and John Neff furthered their popularity, giving us the massive and diverse mutual fund industry we have today.

For more on this topic, read Advantages Of Mutual Funds, Disadvantages Of Mutual Funds and The ABCs Of Mutual Fund Classes.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. How much of a company's stock can a mutual fund own?

    There is no written rule that stipulates how much of a company a mutual fund can own. Instead, there are two major factors ... Read Answer >>
  2. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
  3. How do you find out the price of a mutual fund?

    The easiest way to find out the price of a mutual fund is to look at its net asset value (NAV). NAV is the total value of ... Read Answer >>
  4. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ... Read Answer >>
  5. How do mutual funds work in India?

    Find out how mutual funds work in India, including what types of funds are available, how they are structured and how they ... Read Answer >>
  6. Can you place a stop-loss order on a mutual fund?

    First, remember that a stop-loss order is a limit order placed with a broker to sell a stock when it reaches a certain price. ... Read Answer >>
Related Articles
  1. ETFs & Mutual Funds

    A Mutual Funds Guide for Young Investors

    Learn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
  2. ETFs & Mutual Funds

    4 Mistakes to Avoid When Choosing Mutual Funds to Invest in

    Mutual funds are a great way to build wealth but not all of them are the same. Investors have to be mindful of fees, turnover, redundancy and performance.
  3. Investing

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  4. ETFs & Mutual Funds

    How to Rate Your Mutual Fund Manager

    What to really look for when you're deciding on a mutual fund.
  5. Managing Wealth

    An Introduction To Mutual Funds

    Mutual funds are the starting point for many individual investors because they offer a balanced portfolio in a single investment. Find out how mutual funds work and whether they are the investment ...
  6. ETFs & Mutual Funds

    How liquid are Fidelity mutual funds?

    Review the liquidity features of mutual fund shares and an overview of Fidelity mutual funds. Most investors look for convenient access to their investments.
  7. ETFs & Mutual Funds

    Trading Mutual Funds for a Living: Is It Possible?

    Find out why trading mutual funds for a living isn't your best bet, including how funds discourage short-term trading and which options may better serve you.
  8. ETFs & Mutual Funds

    Mutual Funds Are Awesome - Except When They're Not

    This investment is very popular, but that doesn't mean it comes without risk.
  9. ETFs & Mutual Funds

    The Advantages Of Mutual Funds

    Learn how to get diversification, liquidity and professional management at an affordable price.
  10. ETFs & Mutual Funds

    When To Buy A Mutual Fund

    There is money to be made in mutual funds, but investors fall into several pitfalls that keep them from maximizing their profits. Read these tips to take the uncertainty out of investing in mutual ...
RELATED TERMS
  1. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  2. Mutual Fund Custodian

    A trust company, bank or similar financial institution responsible ...
  3. Exchange-Traded Mutual Funds

    Investopedia explains the definition of exchange-traded mutual ...
  4. Mutual Fund Yield

    Dividend payments divided by the value of a mutual fund’s shares. ...
  5. Pooled Funds

    Funds from many individual investors that are aggregated for ...
  6. Fund Supermarkets

    An investment firm or brokerage that offers investors a wide ...
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center