Mutual fund

A mutual fund is an investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in Europe, and the open-ended investment company in the UK.
Mutual funds are often classified by their principal investments: money market funds, bond or fixed income funds, stock or equity funds, or hybrid funds. Funds may also be categorized as index funds, which are passively managed funds that track the performance of an index, such as a stock market index or bond market index, or actively managed funds, which seek to outperform stock market indices but generally charge higher fees. The primary structures of mutual funds are open-end funds, closed-end funds, and unit investment trusts.
Over long durations, passively managed funds consistently outperform actively managed funds.
Open-end funds are purchased from or sold to the issuer at the net asset value of each share as of the close of the trading day in which the order was placed, as long as the order was placed within a specified period before the close of trading. They can be traded directly with the issuer.
Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The advantages of mutual funds include economies of scale, diversification, liquidity, and professional management. As with other types of investment, investing in mutual funds involves various fees and expenses.
Mutual funds are regulated by governmental bodies and are required to publish information including performance, comparisons of performance to benchmarks, fees charged, and securities held. A single mutual fund may have several share classes, for which larger investors pay lower fees.
Hedge funds and exchange-traded funds are not typically referred to as mutual funds, and each is targeted at different investors, with hedge funds being available only to high-net-worth individuals.

Market size

At the end of 2023, open-end mutual fund assets worldwide were $69.0 trillion. The countries with the largest mutual fund industries are:

United States: $38.8 trillion
Luxembourg: $5.8 trillion
Ireland: $4.5 trillion
China: $3.4 trillion
Germany: $2.7 trillion
Australia: $2.6 trillion
France: $2.5 trillion
Japan: $2.2 trillion
United Kingdom: $2.0 trillion
Canada: $1.8 trillion

In the United States, at the end of 2024, 24% of household financial assets were invested in mutual funds. Almost half of U.S. mutual funds assets were held in individual retirement accounts, 401 plans, or other defined contribution retirement plans. Mutual funds accounted for 38% of the assets in individual retirement accounts and 60% of the assets in 401 plans.
Luxembourg and Ireland are the primary jurisdictions for the registration of UCITS funds. These funds may be sold throughout the European Union and in other countries that have adopted mutual recognition regimes.

History

Early history

The first modern investment funds, the precursor of mutual funds, were established in the Dutch Republic. In response to the financial crisis of 1772–1773, Amsterdam-based businessman Abraham van Ketwich formed a trust named Eendragt Maakt Magt. His aim was to provide small investors with an opportunity to diversify.
In the UK, one of the earliest collective investment schemes was the Foreign & Colonial Government Trust, established in London in 1868, widely regarded as the world’s first investment trust.
The first investment trust in the UK, the Scottish American Investment Trust formed in 1873, is considered the "most obvious progenitor" to the mutual fund, according to Diana B. Henriques.
One of the earliest investment companies in the U.S. similar to a modern mutual fund was the Boston Personal Property Trust that was founded in 1893; however, its original intent was as a workaround to Massachusetts law restricting corporate real estate holdings rather than investing. Early U.S. funds were generally closed-end funds with a fixed number of shares that often traded at prices above the portfolio net asset value. The first open-end mutual fund with redeemable shares was established on March 21, 1924, as the Massachusetts Investors Trust, which is still in existence today and managed by MFS Investment Management.
Unlike earlier closed-end trusts that traded at premiums or discounts to net asset value, the Massachusetts Investors Trust introduced redeemable shares priced on the underlying portfolio value, establishing the core structure of modern open-end mutual funds.
In the U.S., there were nearly six times as many closed-end funds as mutual funds in 1929.
After the Wall Street Crash of 1929, the United States Congress passed a series of acts regulating the securities markets in general and mutual funds in particular.

The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered with the SEC and that they provide prospective investors with a prospectus that discloses essential facts about the investment.
The Securities Exchange Act of 1934 requires that issuers of securities, including mutual funds, report regularly to their investors. This act also created the Securities and Exchange Commission, which is the principal regulator of mutual funds.
The Revenue Act of 1936 established guidelines for the taxation of mutual funds. It allowed mutual funds to be treated as a flow-through or pass-through entity, where income is passed through to investors who are responsible for the tax on that income.
The Investment Company Act of 1940 established rules specifically governing mutual funds.

These new regulations encouraged the development of open-end mutual funds.
In 1936, U.S. mutual fund industry was nearly half as large as closed-end investment trusts. But mutual funds had grown to twice as large as closed-end funds by 1947; growth would accelerate to ten times as much by 1959. In terms of dollar amounts, mutual funds in the U.S. totaled $2 billion in value in 1950 and about $17 billion in 1960. The introduction of money market funds in the high-interest rate environment of the late 1970s boosted industry growth dramatically.
The first retail index funds appeared in the early 1970s, aiming to capture average market returns rather than doing detailed company-by-company analysis as earlier funds had done. Rex Sinquefield offered the first S&P 500 index fund to the general public starting in 1973, while employed at American National Bank of Chicago. Sinquefield's fund had $12 billion in assets after its first seven years. John "Mac" McQuown also began an index fund in 1973, though it was part of a large pension fund managed by Wells Fargo and not open to the general public. Batterymarch Financial, a small Boston firm then employing Jeremy Grantham, also offered index funds beginning in 1973 but it was such a revolutionary concept they did not have paying customers for over a year. John Bogle was another early pioneer of index funds with the First Index Investment Trust, formed in 1976 by The Vanguard Group; it is now called the "Vanguard 500 Index Fund" and is one of the largest mutual funds.
Beginning the 1980s, the mutual fund industry began a period of growth. According to Robert Pozen and Theresa Hamacher, growth was the result of three factors:

A bull market for both stocks and bonds,
New product introductions and
Wider distribution of fund shares. Among the new distribution channels were retirement plans. Mutual funds are now the a preferred investment option in certain types of retirement plans, specifically in 401, other defined contribution plans and in individual retirement accounts, all of which surged in popularity in the 1980s.

The 2003 mutual fund scandal involved unequal treatment of fund shareholders whereby some fund management companies allowed favored investors to engage in prohibited late trading or market timing. The scandal was uncovered by former New York Attorney General Eliot Spitzer and led to an increase in regulation.
In a 2007 study about German mutual funds, Johannes Gomolka and Ralf Jasny found statistical evidence of illegal time zone arbitrage in trading of German mutual funds. Though reported to regulators, BaFin never commented on these results.

Features

Like other types of investment funds, mutual funds have advantages and disadvantages compared to alternative structures or investing directly in individual securities. According to Robert Pozen and Theresa Hamacher, these are:

Advantages

Increased opportunity for diversification: A fund diversifies by holding many securities. This diversification decreases risk.
Daily liquidity: In the United States, mutual fund shares can be redeemed for their net asset value within seven days, but in practice the redemption is often much quicker. This liquidity can create asset–liability mismatch which poses challenges, which in part motivated an SEC liquidity management rule in 2016.
Professional investment management: Open-and closed-end funds hire portfolio managers to supervise the fund's investments.
Ability to participate in investments that may be available only to larger investors. For example, individual investors often find it difficult to invest directly in foreign markets.
Service and convenience: Funds often provide services such as check writing.
Government oversight: Mutual funds are regulated by a governmental body
Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier to compare to each other.
Disadvantages

Mutual funds have disadvantages as well, which include:

Fees
Less control over the timing of recognition of gains
Less predictable income
No opportunity to customize