History

• Mutual funds originated in Europe during the 1800s, but in the U.S. mutual funds began with the creation of an investment pool, similar to a mutual fund, by Harvard University faculty members in 1893. The first legitimate mutual fund was the Massachusetts Investment Trust, launched in 1924. In 1934 the Securities and Exchange Act required investment companies to register mutual funds as securities. The Investment Company Act of 1940 provided further framework for mutual fund companies.
  
  

Benefits

• Mutual funds enable shareholders to diversify their investment portfolios across a broad range of securities, including stocks, bonds and real estate investment trusts. Pooling the assets of many investors together enables minor shareholders to gain access to securities that they could not afford by themselves. Mutual funds are intended to outpace inflation by investing in growth-oriented stock funds, but also provide a buffer against market downturns by investing in conservative instruments, such as jumbo CDs and government bonds.
  
  

Types of Shares

• Mutual funds are sold as A, B and C shares. A shares have upfront fees known as "loads" that usually amount to 4 or 5 percent of the money being invested. B shares have no upfront fees but have a contingent deferred-sales charge, if sold within seven or eight years of purchase. The CDSC begins at 5 percent but decreases each year until the fee is waived altogether. C shares have no upfront fee but impose a CDSC of 1 percent if held less than a year.
  
  

Considerations

• Mutual funds charge management and administration expenses on an annual basis, and these fees cover the costs associated with operating the fund. Many mutual funds also assess 12b-1 fees, which are deducted from the shareholder's balances. B and C shares charge higher annual operating fees than A shares and, despite the initial load fee, legally fund companies have to convert B shares to A shares after seven or eight years to prevent shareholders paying excessive fees.
  
  

Warning

• Mutual funds attempt to perform better than instruments, such as CDs, that offer fixed interest. Due to market volatility, most investment advisers recommend that people hold mutual funds for the long term. Funds with CDSCs are designed for short-term investing, so the vast majority of investors are best advised to buy A shares that do not impose back-end fees. Many institutional investors also prefer A shares because they offer breakpoints, which are fee discounts based on volume.