Pathway of development in mutual fund
Mutual funds have grown significantly as an investment vehicle over the years. Dr Lubna Ansari, Assistant Professor and Coordinator at the Unit Department of Business Administration, Aligarh Muslim University, explains.
Mutual funds captured public attention in the 1980s and ’90s. The investment recorded high returns during that time and investors saw a tremendous increase in the value of their investments. However, the idea of pooling money for a common objective has been during the second half of the 18th century. Investment vehicles were having quite similar characteristics with present mutual funds but it was not actually a form of today’s mutual fund.
The first investment trusts that created tradable ownership of financial securities were: 1. Life Annuities – Tontins 2. Plantation Loans.
Life annuities were the financial loans interest vehicle in the middle ages of France and northern Europe in the 17th & 18th centuries. The life annuities come with a variation as – Tontins that bears some characteristics resemblance to today’s mutual fund. In tontins borrowers promises to pay to the group of people an annuity that is divided among the surviving members. As a member die the return to the survivor's increases. Early tontins were organized by the government. There also exist private tontins. Payment for early tontins were backed by the power of taxation. And private tontins have an association with 17th-century collateral security. These private tontins guarantee the periodic payments to their participants. Private tontins resemble investment trust in the joint ownership of financial securities. The share of tontins were associated with the lives of its participants.
Plantation Loans: The second type of security shows similar characteristics to 18th-century investment tools known as plantation loans. Investor mortgages to planters were not securities in themselves which do not resembles a mutual fund. These 18th century Plantation Loan roots lie with the Deutz & co. Subsequent loans to the emperor were financed by organizing a negotiation under the direction of his heirs who issued bonds in the Dutch capital market.
In 1753 the same techniques were applied to mortgage loans to West Indies Plantation owners. Between 1753 &1776 about 200 plantation loans were in the market in the West Indies that amounted to the majority of new collateral securities were introduced during this period. Many of the early mutual funds allocated large portion of their portfolios to plantation loans.
Genesis of Mutual Fund
Palaeographers are not certain of the origin of professionally managed investment funds. Some have cited the closed-ended investment companies launched in Netherland in 1822 by king William I as the first mutual funds. Others pointed out that an investment trust created in 1774 by a Dutch merchant Adrian Van Ketwich would have given the king the idea of developing professionally managed investment funds.
After the financial crisis of 1772-73, the trust formed by Adrian Van Ketwich aimed to provide investment diversification at a low cost to small investors. In 1774 Ketwich invited a subscription from investors to form an investment trust under the name of Eendragt Maakt Magt. Spreading of risk was achieved by investing in Austria, Denmark, Germany, Spain, Sweden and a variety of colonial plantations in Central and South America. During the 18th century, very few equities were listed on the Amsterdam Stock exchange therefore, the trust only invested in bonds. Besides this some historians marked that the foreign and colonial government trust in 1868 as the beginning of modern-day mutual funds.
After the existence of investment trust in Holland for almost a century, next wave of mutual funds included investment trust launched in Switzerland in 1849 followed by Sweden in 1850, Great Britain, France and US in 1890’s.
Nineteenth-Century MF
The investment trust formed in 1868 paved way for a new type of investment option, present-day Mutual Fund. The goal of the trust was to provide moderate means of investors some advantage as the large capitalist in diminishing the risk of investing in foreign and colonial government stock by an investment over several different stocks. During the 19th century in US many of the early investment trusts were closed-end funds. Repurchase or issue of these closed-ended funds was not frequent. This trend of low repurchase or infrequent issue of these funds changed in 1924 when the Massachusetts Investors trust came into existence with an open-ended capitalization. The open-ended investment trust allows for the continuous issue and redemption of shares at proportional prices to the value of the underlying investment portfolio. Since then, open-ended funds were preferred more than other available investment models.
Indian Scenario of mutual fund
The economic turmoil and the wars in the early sixties de-pressed the financial markets, making it difficult for both existing and new entrepreneurs to raise fresh capital. The then Finance Minister, TT Krishnamachari, set up the idea of a Unit Trust which would mobilize the savings of the community and invest these savings in the capital market. His ideas took the form of the Unit Trust of India, which commenced operations in July 1964 ‘to encourage savings and investment and participation in the income, profits and gains accruing to the Corporation from the acquisition, holding, management and disposal of securities’.
The regulations passed by the Ministry of Finance (MOF) and the Parliament from time to time regulated the functioning of UTI. Different provisions of the UTI Act laid down the structure of management, scope of business, powers and functions of the Trust as well as accounting, disclosures, and regulatory requirements for the Trust. At the initiative of the Government of India and Reserve Bank of India mutual funds in India started. The industry has evolved from a single player in 1964 to a fast-growing competitive market. UTI as a single played paved the way to 44 others to enter the industry.