A mutual fund is operated by an investment firm that raises money from shareholders and then invests in a group of assets (equities or fixed income). The mutual fund portfolio manager invests in accordance with a stated set of objectives (guidelines). The mutual fund company raises money by selling shares of the fund to the public (usually there are very few stipulations on who can invest in the fund). Mutual fund managers then take the money they receive from the sale of the shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds, and money market instruments. Shareholders are free to sell their shares at any time. They can also exchange their ownership interest for shares in another fund sponsored by the same fund distributor. Mutual funds try to match or exceed an investment benchmark—the Standard & Poor’s 500 or Dow Jones Industrial Average, for example.
Mutual funds have grown increasingly popular in the last 30 or so years because funds are diversified (which reduces risk), affordable (investors can participate in funds with as little as $2,000 and invest as little as $50 a month), and liquid (they can be redeemed any day the financial markets are open), among other benefits. Approximately 57.2 million U.S. households owned mutual funds in 2018, up from 28.4 million households in 1995 and 12.8 million households in 1985.
The first mutual fund was started in 1774 in Holland by a Dutch merchant and broker named Adriaan van Ketwich, according to K. Geert Rouwenhorst in the Origins of Mutual Funds. A type of mutual fund was introduced in the United States in the late 1800s, but mutual funds did not become popular until the 1920s, when the first mutual, or “open ended” fund was launched. Mutual funds grew increasingly popular in the early 1950s, and the total number of funds surpassed 100. By 1990, mutual funds had become very popular investment options, wit...