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.

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