All About Mutual Funds
A mutual fund is a financial company that forms a group of investors to pool their money together with an investment objective that has been determined beforehand. The mutual fund will pay a fund manager who will have the responsibility of deciding where to invest the pooled funds; usually stocks or bonds.
Stocks And Bonds
When you buy shares of a mutual fund you become a shareholder of the fund. You may view it as an investor as if you own a piece of a lot of different companies. Mutual funds frequently own stocks which represent shares of ownership in a public company. Stocks are the most common financial instrument traded on the market.
When you purchase bonds you are lending money to a company or a government. There will be a predetermined schedule for repaying the interest and principal. Bonds are the most common type of lending investment traded on the market.
A Brief History
The initial idea of pooling money together for investment purposes probably started in the mid 1800's in Europe. In the United States, the first pooled fund was created by the faculty and staff of Harvard University in 1893.
In 1924, the first mutual fund was created when three Boston securities executives pooled their money together to form the Massachusetts Investor Trust. After only one year of operation, the Massachusetts Investor trust grew from $50,000 in assets to $392,000 in assets.
Around 200 individual investors reaped the financial rewards of this rapid increase of pooled funds. According to the experts at the Investment Company Institute, there are over 10,000 mutual funds in existence in the U.S. today. Their pooled funds equal around seven trillion dollars which is owned by 83 million investors.
The Stock Market Crash Of 1929
The tremendous rapid growth of mutual funds was slowed greatly when the stock market crashed. In response to the crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These acts require that a fund be registered with the Security Exchange Commission and provide prospective investors with a prospectus. Six years later in 1940 the Investment Company Act was passed and today provides guidelines that all mutual funds must abide by.
Pooled Funds
The use of the term "pooled fund" refers to when people put their money together for an expected profit. It is very interesting that in dog racing and horse racing the combined amount of the money people bet on a race is called the betting pool.
In both mutual funds and dog and horse racing, a percentage of the pool is deducted and given to management. In dog and horse racing 20% is deducted from the pool before each race is run and after the race is completed the remaining 80 % is paid to the winners. A mutual fund management fee at 20% would be ridiculously high. Now you see why very few people can win at betting dog or horse betting.
