Brief History of Mutual Funds

Just 76 years ago the mutual fund industry was born in the United States.  The  first open-end mutual fund, Massachusetts Investors Trust was founded on March 21, 1924 and after one year had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds, represented less than $10 million in 1924.  At the end of  December 1999, the industry's explosive growth includes more than 8,000 mutual funds with over $6.8 trillion in assets.

First 27 Years Experienced Slow Growth

Growth for the industry during the first 27 years was slow. In 1951, the number of funds surpassed 100 and the number of shareholders exceeded 1 million. It wasn't until 1954 that the stock market finally rose above its 1929 peak and by the end of the fifties there were 155 mutual funds with $15.8 billion in assets. In 1967 funds hit their best year, one quarter earning at least 50% with an average return of 67%, but it was done by cheating using borrowed money, risky options, and pumping up returns with privately traded "letter stock."  By the end of the 60's there were 269 funds with a total of $48.3 billion. 

Index Funds are Born in 1970s

In 1976, John C. Bogle opened the first retail index fund - First Index Investment Trust (now the largest index fund - Vanguard 500 Index) and the next year Peter Lynch took over at Fidelity Magellan, now the largest stock mutual fund. The two funds are battling for top spot and some think the Vanguard 500 Index will surpass Fidelity Magellen by the year 2000. By the end of the 70s there were 524 funds with $94.5 billion in assets.

Major Growth after IRA Introduced

In 1981, Congress created the Individual Retirement Account and by the end of the 80s there were 2,917 funds and $982 billion in assets. The next big change for the industry was in 1991 when Morningstar introduced its "star ratings." By 1994, 75% of all new investments were in funds with a rating of four or five stars. In 1992, Charles Schwab started OneSource, the first "fund supermarket."

As of December 1998, stock mutual funds account for $2.981 trillion or 53.9% of total mutual fund industry assets. Money market funds account for 24.5% ($1.353 trillion), bond funds comprise 15.0% ($830.5 billion), and hybrid funds hold 6.6% ($365.1 billion). Mutual funds held about 20% of all publicly traded U.S. stocks in 1998. The remaining 80% was held by households, private pension funds, state and local government retirement funds, insurance companies, private trusts, residents of foreign countries, and other investors. These numbers are gathered by the Investment Company Institute.