Tags: investment instrument | mutual fund

A mutual fund is a pooled and professionally managed investment instrument. By pooled we mean that many people or investors have bought or purchased shares. When you buy shares you become a shareholder. Typically the mutual fund purchase is done in a 401k or IRA, or brokerage account. The large investment companies such as Fidelity or Vanguard provide individuals direct access to buying their funds.

The professional management is primarily about expertise as well as being registered and following the various laws regarding investment sales, reporting guidelines and legal structure. As a result of the stock market crash of 1929 the Securities Act of 1933 was passed, this was the first of many laws governing mutual funds.

Mutual funds have a fascinating history beginning in Europe with a Dutch merchant in 1774. After first being introduced in the United States in the 1890s, they grew in popularity until the 1929 crash. The advent of the corporation and defined benefit plans led to extended slow growth period for the industry until 1970’s, when middle class America had funds to invest. The industry continued to grow rapidly in the 1980s and 1990s as 401ks and IRAs became the standard retirement investment instrument.

The number of funds available has grown from 360 in the early 1970s to move 7,600 at the end of 2009. Per the Investment Company Institute (ICI), combined assets in mutual were $11.121 trillion for US shareholders and $22.964 trillion worldwide.

For the person with a long time horizon to hold shares mutual funds can be an effective investment instrument. The caveat for investors is to be aware that the buy and hold strategies of the past may not be effective in the future. The dot.com bubble, the 2008 crash and the 2011 market crash have taught the harsh lesson of ignoring periodic portfolio reviews and asset allocation.