- Mutual funds evolved from groups of individuals putting money together to buy company shares. The first official mutual fund began in Boston during 1924. The Massachusetts Investment Trust started as an investment pool of three men, but within a year 200 people had shares in it.
The 1934 Securities Exchange Act required mutual funds to register with the Securities and Exchange Commission. The 1940 Investment Company Act added further layers of regulation. - Most mutual funds allow people to invest as little as $1,000. Mutual funds pool together money from individuals and corporate clients and purchase a variety of different investments. A person with $1,000 could not spread the money across multiple investment products and expect to make a significant return. Many mutual funds contain other high-performing funds that require minimum investments of $1 million or more. People gain access to these exclusive funds through regular mutual funds.
- Standard mutual funds contain conservative, moderate and aggressive models that cater to people in different age groups with varying levels of wealth. People investing for the long term invest in stock-heavy funds, while people close to retirement invest in funds with few stocks but mostly bonds and cash equivalents.
People in high tax brackets enjoy tax-free income from municipal bonds, but even these funds diversify between high-quality low-yield bonds and high-risk, high-yield junk bonds. - Many people view mutual funds as stocks because to own them they must buy shares. Many mutual funds contain no stocks at all. Bond funds, real estate funds and money-market mutual funds offer conservative options to investors seeking places to stow money. The funds offer diversity within the parameters of the funds' stated objectives and types of holdings, but do not expose shareholders to stock volatility. The mutual funds shares are priced based upon the daily performance of the underlying assets and are priced just once each day.
- Mutual funds offer clients diversity, but few tangible protections during market downturns. Even conservative instruments such a bonds fund lose value during a market crash. In theory, the most diversified mutual fund could become worthless if the underlying assets lose value. Mutual funds with overseas assets offer some more variety, but truly diversified investors have assets in products beyond just mutual funds. FDIC-insured bank products offer protection of principal, and insurance contracts including annuities provide income guarantees.
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