The mutual fund was born from a financial crisis that shattered Europe in the early 1770s.The British East India Company had borrowed heavily during the preceding years to support its ambitious colonial interests, particularly in America where there was a revolution in a few years. As expenses increased and revenue from colonial adventures decreased, the East India Company sought a bailout in 1772 from the already-shaken British treasury. It was the “original too big to fail corporation” and the repercussions were felt across the continent and across the world.
At the same time-period, the Dutch were facing their own challenges, expanding and exploring like the British and taking “copy-cat risks” in a pattern that had drawn parallels to the banking crisis that the world saw in 2008. Against this backdrop, a Dutch merchant, Adriaan van Ketwich, had the foresight to pool money from a number of subscribers to form an investment trust, which would be the world’s first mutual fund in 1774. The financial risk to the mainly small investors was spread by diversifying across a number of European countries and the American colonies, where investments were backed by income from plantations, that was an early version of today’s mortgage-backed securities.
Subscription to the closed-end fund, which Van Ketwich called “Eendragt Maakt Magt” or “unity creates strength”, was available to the public until all the 2,000 units were purchased. After that, participation in the fund was available only by buying shares from existing shareholders in the open market. The fund’s prospectus required an annual accounting, which investors could see if they requested. Two subsequent funds set up in The Netherlands increased the emphasis on diversification to reduce risk, escalating their appeal to even smaller investors with minimal capital.
Van Ketwich’s fund survived until 1824, but the vehicle he created is still a trademark of personal investing even after two centuries with around $ 27.86 trillion in global assets in July 2013. In Canada alone, mutual funds represent $ 1.43 trillion. The early mutual funds spread were of the closed-end variety, issuing a fixed number of shares. They spread from The Netherlands to England and France before heading to the U.S. in the 1890s.
The first modern-day mutual fund called the Massachusetts Investors Trust, was created on March 21, 1924. It was the first mutual fund with an open-end capitalization, allowing for the continuous issue and redemption of shares by the investment company. After just one year, the fund grew to $ 392,000 in assets from $ 50,000. The fund went public in 1928 and eventually became known as MFS Investment Management.
In 1932, the first Canadian fund, Canadian Investment Fund Ltd. (CIF), was established and by 1951 had assets of $ 51 million. It changed its name to Spectrum United Canadian Investment Fund in November 1996 and to CI Canadian Investment Fund in August 2002.
The growth of mutual funds and their impact on investing in general was epoch making and revolutionary. For the first time, ordinary investors with minimal capital could pool their resources in a professionally managed, diversified basket of investments, rather than going the more expensive route of buying individual stocks of varying risks. This was considered a “giant step in the democratization of investments for the common man”.
The first major sign of growth and popularity of mutual funds in Canada took place in the early 1960s when total assets doubled from $ 540 million in 1960 to more than $ 1 billion by the end of 1963. But the largest influx into mutual funds in Canada came during the 1990s when double-digit interest rates that had lured Canadians into investing with GICs tumbled and investors moved into investments with the potential for higher returns.
Interest rates and mutual fund sales had a direct association in the 1990s. In May 1990, the Bank of Canada, on which financial institutions base their interest rates, stood at one of its highest levels ever of 14.05%. From that point, the rate began a steady decline, hitting 6.81% in 1993 and 4.11% at the end of the year. As the bank rates fell, mutual fund sales surged, jumping 140% from the end of 1992 to the end of 1993 as strong markets sent assets climbing to almost $ 114.6 billion. The Bank rate dropped to 3.25% in January 1997 before slowly climbing to 5% in January 2000.
In 2008, global markets were rocked by a financial crisis, triggered by an over-extended housing crisis in the U.S. and was marked by financial sector collapses and bailouts similar to the European crisis in 1770s that spawned the original mutual fund. Canada escaped largely untouched compared to other countries, particularly the U.S., thanks to tighter mortgage rules and a regulated banking system. Canadian mutual funds survived, too, and after a brief downturn continue to thrive as a popular and valued savings device for Canadian investors.
The idea of pooling resources and spreading risk using closed-end investments found its way to the U.S. by the 1890s. The Boston Personal Property Trust, formed in 1893, was the first closed-end fund in the U.S. According to Collins Advisors, the investments were primarily in real estate and the vehicle might today be described as a hedge fund rather than a mutual fund.
The Indian mutual fund industry started in 1963 with the formation of the Unit Trust of India (UTI). It was a joint initiative by the Government of India (GOI) and the Reserve Bank of India (RBI). The history of mutual funds in India can be segregated into four distinct phases.
Currently, the industry has crossed a landmark of Rs 27 lakh crores AUM and stands at Rs 27,04,699 crore as on 30th November, 2019 while still having high-growth prospects. The recent regulations by SEBI namely on the re-categorization alongside changes in expense ratios and commission structure have helped the industry to grow by allowing fair competition while continuing to protect investors’ interests.
So, the Mutual Funds has a long and interesting history.