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. In Europe, UCITS funds, primarily registered in Luxembourg and Ireland, are considered mutual funds, while similar structures include the SICAV and the open-ended investment company (OEIC) in the UK.
While exchange-traded funds are generally more popular with investors due to their tradability, lower fees, and tax advantages, mutual funds are popular in the U.S. among sponsors of 401(k) plans since open-end funds are priced only at the end of the trading day and fractional shares are easily purchased, making it easy for direct investment from payroll.
Mutual funds are often classified by their principal investments: stock fund, bond fund, money market fund, or hybrid fund. 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 types of securities in which a particular fund may invest in are set forth in the fund's prospectus, a legal document that describes the fund's investment objective, investment approach and permitted investments. The investment objective describes the type of income that the fund seeks.
The primary structures of mutual funds are open-end funds, whereby shares are purchased and sold directly from the issuers at the net asset value, and less commonly, closed-end funds, which are sold on securities exchanges and for which no more shares can be created.
Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The advantages of mutual funds include economies of scale, diversification, market liquidity, and professional investment management.
A mutual fund is technically a mutual organization. It is organized by a management company, which does not own the fund but receives a management fee. Mutual funds are regulated by governmental bodies and are subject to securities laws. Fund managers 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.
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(k) 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(k) plans.
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 (or Adriaan) van Ketwich formed a trust named Eendragt Maakt Magt ("unity creates strength"). His aim was to provide small investors with an opportunity to diversify.Goetzmann, William N.; Rouwenhorst, K. Geert (2005). The Origins of Value: The Financial Innovations that Created Modern Capital Markets. (Oxford University Press, ))
The first investment trust in the UK, the Scottish American Investment Trust formed in 1873, is considered the "most obvious progenitor" of 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, which 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.
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 (as opposed to closed-end 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.Robin Wigglesworth (2021). Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever. Portfolio Books, ISBN 0593087682 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 (including funds based on municipal bonds, various industry sectors, international funds, and target date funds) 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(k), other defined contribution plans and in individual retirement accounts (IRAs), 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 Purchase and sale only once per day, at uncertain prices No intraday trading; no limit orders or shorting Potentially more cash drag, as mutual funds must hold more cash to meet redemptions Potentially higher taxes New investors inherit old tax liabilities When some investors join or leave the fund, the costs (both trading costs and stale pricing) are borne by all investors in the fund
Sometimes investors in mutual funds can face tax bills for taxes incurred before they bought into the fund.
John Bogle preferred mutual funds, regarding ETFs as encouraging trading and speculation. He was opposed to ETFs for high-fee actively-managed funds, and noted that many investors failed to capture the full returns of their funds by chasing returns (buying high and selling low).
Expenses Investors in a mutual fund pay the fund's expenses. Some of these expenses reduce the value of an investor's account; others are paid by the fund and reduce net asset value.
These expenses fall into five categories:
Management fee
The management fee is paid by the fund to the management company or sponsor that organizes the fund, provides the portfolio management or investment advisory services, and normally lends its brand name to the fund. The fund manager may also provide other administrative services. The management fee often has breakpoints, which means that it declines in percentage as the invested amount (in either the specific fund or in the fund family as a whole) increases. The fund's board reviews the management fee annually. Fund shareholders must vote on any proposed increase, but the fund manager or sponsor can agree to waive some or all of the management fees in order to lower the fund's expense ratio.
Index funds generally charge a lower management fee than actively-managed funds.
Distribution charges