Although it is uncertain, many trace the creation of the first mutual fund back to Dutch merchant Adriaan Van Ketwich. In 1774. Van Ketwich introduced the fund under the name Eendragt Maakt Magt ("Unity Creates Strength").

The new closed-end fund allowed potential investors to purchase shares in the fund until all of the 2,000 available units were sold. Once the fund was full, the only way to gain access to the fund's holdings was to purchase units from an existing shareholder. Van Ketwich's fund also included an annual accounting statement which shareholders could request to view at any time.

This model of mutual fund began to gain popularity in Europe throughout the late 1700s and through the 1800's, eventually reaching the shores of America in the 1890s. The first American closed-end mutual fund came in 1893 with the creation of the Boston Personal Property Trust. Shortly after, the Alexander Fund innovated by allowing investors to take out money whenever they wanted to.

America's First Mutual Funds

The modern mutual fund that we know today first appeared in Boston in 1924 with the introduction of the Massachusetts Investors' Trust, which was the first mutual fund with an open-end capitalization, allowing the fund to continuously issue and redeem its shares. After only one year of existence, the fund's popularity was obvious. The fund's holdings grew from $50,000 to more than $390,000. The fund was also the first of its kind to go public in 1928. That same year saw the introduction of the Wellington Fund (now part of the Vanguard family of funds), which was the first mutual fund to include stocks and bonds, as opposed to direct merchant bank style of investments in business and trade. (See also: A Brief History of the Mutual Fund.)

The stock market crash in 1929 looked like the end for mutual funds, but out of that debacle came the creation of the Securities and Exchange Commission (SEC), and the Securities Exchange Act. These two events helped protect investors.

Perhaps the most significant regulation, though, was the Investment Company Act of 1940, which helped set forth the modern mutual fund, hedge fund, and exchange-traded fund (ETF) industries. 

The Investment Company Act of 1940 was created through an act of Congress to require investment company registration and regulate the product offerings issued by investment companies in the public market. This piece of legislation clearly defines the responsibilities and requirements of investment companies as well as the requirements for publicly traded investment product offerings including open-end mutual funds, closed-end mutual funds and unit investment trusts. It primarily targets publicly traded retail investment products. (Read more: Investment Company Act Of 1940)

The next major development was the first index fund. This was a Wells Fargo fund formed in 1971. In 1974, the first mutual fund index shares were offered to retail investors. Once IRAs came along, the public acceptance of mutual funds exploded. Putting mutual funds in a retirement account is now considered standard practice. Finally, exchange-traded funds came along in 1993. These are like mutual funds, but can be traded throughout the day like stocks.

The Bottom Line

The very first mutual fund in 1774 was not merely a new idea about pooling investors’ money to buy stocks; it was the beginning of a process that would bring the average person into the stock market.