Measuring Mutual Fund Performance
Mutual fund performance can be measured over a number of different time frames. The investor looks at a potential mutual fund's history of profits as a guideline on what might happen tomorrow. A person who puts their money in a mutual fund is actually spreading their dollars over a number of different companies.
Make no doubt about it, looking at mutual fund performance is only a guide; you can still lose money. Less risky than the stock market because you are invested in a number of different companies, mutual funds can still lose money if not managed correctly
Mutual funds usually invest primarily in stocks and bonds. A fund manager usually has the responsibility in selecting the mix of stocks and bonds, guided by the mutual fund's performance prospectus.
History Of Mutual Funds
The idea of pooling money together for investment purposes probably started in the mid 1800s in Europe. The first pooled fund was created in the US by the staff and faculty 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. The performance was terrific for this very first mutual fund in its first year. The original assets grew from $50,000 to $392,000 which was spread between 200 individual investors.
Today there are over 10,000 mutual funds in the US with 83 million investors and 7 trillion dollars in assets.
The Stock Market Crash Of 1929
Mutual fund performance went into the tank when the stock market crashed because most of the mutual funds had their portfolios full of common stocks just like the individual investor in the stock market.
In response to the crash, Congress passed the Securities Act of 1933 and a year later the Securities Exchange Act of 1934. These acts require that the fund be registered with the Securities Exchange Commission and provide prospective investors with a prospectus. A prospectus contains information about the mutual fund's costs, investment objectives, risks, and performance.
The detailed guidelines for how to behave as a mutual fund were laid out in the Investment Company Act of 1940.
Individual Retirement Account (IRA)
The biggest growth factor ever to affect the mutual fund performance industry occurred when in 1981 the Individual Retirement Act was passed. This act allowed individuals who were already in a corporate pension plan to contribute up to $2,000 a year to a mutual fund. These individuals correctly felt that their $2,000 investment was buying them a small piece of many different businesses. In this manner, people felt they were stockholders who did not have to deal with stockbrokers.
