When did mutual funds come to the U.S.A.?

By Andrew Beattie AAA
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. What are the main differences between a systematic investment plan (SIP) and mutual ...

    Reduce your average cost per share on mutual fund investments using the dollar-cost averaging strategy by way of a systematic ...
  2. What are the benefits and costs (or risks) of a systematic investment plan (SIP)?

    Discover the advantages and disadvantages of using a systematic investment plan; you may lower your average cost, or you ...
  3. What are some examples of the most common types of investments on an IRA?

    Explore different investments commonly held in investment retirement accounts, such as certificates of deposit and exchange ...
  4. How can I convert a 401(k) into a Roth 401(k)?

    Investigate how to convert a 401(k) into a Roth 401(k) and compare the two different types of defined contribution pensions ...
RELATED TERMS
  1. Historic Pricing

    A method for calculating the value of an asset using the last ...
  2. Bear Fund

    A mutual fund designed to provide higher returns when the market ...
  3. Ulcer Index - UI

    An indicator developed by Peter G. Martin and Byron B. McCann ...
  4. Investment Company Act Of 1940

    Created in 1940 through an act of Congress, this piece of legislation ...
  5. Product Portfolio

    Investopedia explains: A Product Portfolio is the collection ...
  6. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
comments powered by Disqus
Related Articles
  1. Mutual Funds Commonly Found In Retirement ...
    Mutual Funds & ETFs

    Mutual Funds Commonly Found In Retirement ...

  2. Will ETFs Eventually Replace Mutual ...
    Mutual Funds & ETFs

    Will ETFs Eventually Replace Mutual ...

  3. Understanding The Bond Behemoth That ...
    Mutual Funds & ETFs

    Understanding The Bond Behemoth That ...

  4. Alternatives To Pimco's Total Return ...
    Bonds & Fixed Income

    Alternatives To Pimco's Total Return ...

  5. Pimco Investor? Consider This Before ...
    Investing News

    Pimco Investor? Consider This Before ...

Trading Center