The advent of mutual funds in the 1770's heralded a significant development in the democratization of investing, allowing the average person to participate in the markets through a reasonably priced, pooled product diversified to manage risk. That one small fund saw the beginnings of a new financial services industry that has now grown to US$19.99 trillion in assets around the world.
The history of the mutual fund is more than two centuries old with the creation in 1774 of what's believed to be the first (closed-end) mutual fund by Dutch merchant Adriaan Van Ketwich. Subscription to the fund, which Van Ketwich called "Eendragt Maakt Magt" ("unity creates strength"), was available to the public until all 2,000 units were purchased. After that, participation in the fund was available only by buying shares from existing shareholders in the open market. The fund's prospectus required an annual accounting, which investors could view if they requested. Two subsequent funds set up in the Netherlands increased the emphasis on diversification to reduce risk, escalating its appeal to smaller investors with minimal capital.
These early mutual funds then took root in England and France before heading to the United States in the 1890s. Most of the first mutual funds were of the closed-end variety, issuing a fixed number of shares. What is hailed as the first modern-day mutual fund, Massachusetts Investors Trust, was created on March 21, 1924. It was the first mutual fund with an open-end capitalization, allowing for the continuous issue and redemption of shares by the investment company. After just one year, the fund grew to $392,000 in assets from $50,000. The fund went public in 1928 and eventually became known as MFS Investment Management. The first Canadian fund, Canadian Investment Fund Ltd. (CIF), was established in 1932, with assets of $51 million in 1951. It changed its name to Spectrum United Canadian Investment Fund in Nov 1996 and this fund changed name at the end of August 2002 to CI Canadian Investment Fund.
Mutual Funds grow in popularity with the average Canadian investor
The growth of mutual funds and their impact on investing in general was nothing short of revolutionary. For the first time, ordinary investors with minimal capital could pool their resources into a professionally managed, diversified basket of investments, rather than going the more expensive route of buying individual stocks of varying risks. This was considered a giant step in the democratization of investments for the average person.
The first major sign of growth and popularity of mutual funds in Canada took place in the early 1960's when total assets doubled from $540 million in 1960 to more than $1 billion by the end of 1963. But the largest influx into mutual funds in Canada came during the 1990s when double-digit interest rates that had lured Canadian savers into GIC's tumbled and investors moved into investments with the potential for higher returns.
The Growth and exponential expansion of Mutual Funds in Canada
Interest rates and mutual fund sales had a direct correlation in the 1990s. In May 1990, the Bank of Canada rate – on which financial institutions base their interest rates – stood at one of its highest levels ever -- 14.05 per cent. The Bank rate steadily declined and by January 1993, was sliced in half at 6.81 per cent and by the end of December 1993 it was down again to 4.11 per cent. Mutual fund sales surged 140 per cent from the end of 1992 to the end of 1993 and strong markets sent assets up to almost $114.6 billion. The Bank rate dropped to 3.25 per cent in January 1997 before slowly climbing to five per cent in January 2000.
At the same time, mutual funds continued their climb and became the fastest-growing segment of the Canadian financial services sector during the 1990s, with assets under management increasing from $25 billion in December 1990 to $426 billion by December 2001, an increase of 1,700 per cent. These assets were managed in about 1,800 different mutual funds held in more than 50 million unit holder accounts.
Mutual funds offer Canadians a superior means of accumulating wealth through access to a broad range of personalized investment solutions based on sound investing principles.
Mutual Funds include:
• Professional portfolio management
• Streamlined and convenient administration
• Risk management through diversification
• Innovative solutions that meet a wide range of investment objectives and evolving investor needs
• Opportunities for foreign and domestic investment that may not otherwise be directly accessible to investors
• Liquidity, enabling investors to respond to changes in their personal circumstances
• Access to investing for all types of people, including those who prefer to invest small amounts at regular intervals
• Choice of purchase methods and fee structures, including full service, fee-for-service and do-it-yourself
• Accountability and fairness to investors through industry regulation and transparency
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