You probably think the mutual fund is a modern invention of Wall Street suits in the 1980s. It isn’t. Honestly, the roots go back way further than the neon lights of the Reagan era, stretching all the way to a time when wooden shoes were high fashion.
Wealth used to be a gated community. If you weren't a literal aristocrat or a merchant king, you basically had nowhere to put your money except under a mattress or in physical land. The history of mutual fund industry begins as a story of democratization. It’s about how regular people—teachers, bakers, and clerks—eventually got a seat at the table.
The Dutch Origin You Never Heard About
Forget New York. The year was 1774. A Dutch merchant named Adriaan van Ketwich looked at the market and saw a problem. Investing was too risky for the little guy. If you put all your guilders into one ship and that ship sank, you were broke. Simple as that.
Van Ketwich’s solution was a trust named Eendragt Maakt Magt. That translates to "Unity Creates Strength." It’s a bit on the nose, sure, but it worked. He pooled money from small investors to buy a diversified mix of bonds from foreign governments and plantation loans. By spreading the risk, he created the DNA of the modern fund. If one "ship" sank, the other nineteen kept the portfolio afloat.
It was a closed-end trust. This meant there was a fixed number of shares. You couldn't just pop in and out whenever you felt like it. But the seed was planted: the idea that a collective group could do more together than they could alone.
1924: The Year Everything Actually Changed
Fast forward to Boston in the Roaring Twenties. This is where the history of mutual fund industry takes its biggest leap toward what you see in your Vanguard or Fidelity account today.
On March 21, 1924, the Massachusetts Investors Trust (MIT) was born. This was the first "open-end" mutual fund. This distinction is massive. Unlike the Dutch trusts, MIT allowed investors to redeem their shares at any time for the net asset value (NAV) of the underlying stocks. It also meant the fund could continuously issue new shares as more people wanted in.
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Then came 1929.
The Great Depression almost killed the industry in its crib. While the mutual fund structure itself actually held up relatively well compared to the highly leveraged "investment trusts" of the era, the public was spooked. People lost everything. Trust in the financial system was at an absolute zero.
The Law That Saved the Game
Most people find regulation boring. They’re usually right. But you can't talk about this industry without the Investment Company Act of 1940. Before this, the Wild West was an understatement. Managers could basically do whatever they wanted with your money, including "borrowing" it for their own side projects.
The 1940 Act changed the game. It mandated disclosure. It required funds to have independent boards. It forced them to value their holdings every single day. Basically, it made the mutual fund the most regulated, and therefore "safest," way for a regular person to touch the stock market.
The industry didn't explode immediately, though. It simmered. By the end of WWII, there were still fewer than 100 funds in existence. Total assets were around $450 million. To put that in perspective, that’s basically pocket change for a mid-sized hedge fund today.
The 70s, 80s, and the Bogle Revolution
If the 40s were about safety, the 70s were about rebellion. Enter John C. "Jack" Bogle.
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In 1975, Bogle founded Vanguard and launched the first index fund for individual investors. At the time, the industry laughed. They literally called it "Bogle's Folly." Why would anyone want a fund that only aimed to track the market rather than beat it?
Wall Street thrives on the idea that their "genius" is worth a 2% fee. Bogle disagreed. He realized that after fees and taxes, almost nobody beats the market long-term. So, he built a fund that just bought everything. It was cheap. It was boring. And it eventually ate the industry's lunch.
Around the same time, the 401(k) was born. Section 401(k) of the Internal Revenue Code was actually a bit of an accident, a loophole found by a consultant named Ted Benna in 1978. Suddenly, companies started moving away from traditional pensions toward these defined contribution plans.
The history of mutual fund industry shifted from a luxury for the wealthy to a necessity for the middle class. If you wanted to retire, you had to be an investor. The mutual fund was the vehicle everyone was forced to drive.
Why the 90s Felt Like a Fever Dream
The 1990s were the "Rock Star Manager" era. You had guys like Peter Lynch at Fidelity Magellan, who averaged a 29% annual return over 13 years. People treated these guys like athletes. You’d see their faces on the cover of Money magazine every other month.
Assets poured in. In 1990, mutual fund assets were around $1 trillion. By the year 2000, they were over $7 trillion.
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But there was a dark side. The tech bubble burst in 2000, and a lot of those "genius" managers looked pretty human when their portfolios dropped 60%. Then came the 2003 "Late Trading" scandal, where some funds were allowing big hedge funds to trade after hours, effectively stealing pennies from regular investors. It was a wake-up call. The industry wasn't a charity; it was a business, and sometimes a dirty one.
The Modern Pivot: ETFs and the "Race to Zero"
Where are we now? We’re in the middle of a massive migration.
Exchange-Traded Funds (ETFs) are the new shiny object. They’re like mutual funds, but they trade all day on an exchange like a stock. They’re often more tax-efficient. Because of this, we've seen hundreds of billions of dollars flee traditional "active" mutual funds for passive ETFs.
Fees have collapsed. We are literally in a "race to zero." Fidelity now offers funds with a 0.00% expense ratio. Think about that. They are managing your money for free (mostly to get you in the door for other services).
This is the ultimate conclusion of the history of mutual fund industry. It started with a Dutch merchant charging a premium for a bit of safety. It ended with the entire world's stock market available to anyone with a smartphone and $5, for almost no cost at all.
What You Should Actually Do With This Information
Knowing the history is great for trivia night, but it should also change how you look at your brokerage account. Here is the reality of the landscape today:
- Stop chasing the "Rock Star": History shows that the Peter Lynches of the world are outliers. Most active managers underperform a simple index fund over 10 years.
- Check the "Expense Ratio": In the 1980s, 1.5% was normal. Today, if you’re paying more than 0.20% for a broad market fund, you’re getting fleeced.
- Diversification is still the only free lunch: Adriaan van Ketwich was right in 1774. Spreading your money across different sectors and geographies is the only way to survive the "sinking ships" of the global economy.
The mutual fund survived the Great Depression, two World Wars, the 70s inflation, and the 2008 crash. It’s not going anywhere, even if it changes its shape into an ETF. The core principle remains: unity creates strength.
Your Next Steps for a Smarter Portfolio
- Audit your 401(k) or IRA today. Look specifically for "Target Date Funds" or "Active Growth Funds" and look at the "Expense Ratio" column. If it starts with a 1 (like 1.10%), search for an index alternative in your plan that starts with a 0 (like 0.05%).
- Verify the turnover rate. High turnover means the manager is buying and selling constantly. This creates tax bills for you, even if you didn't sell your shares. Look for funds with turnover below 20%.
- Consolidate old accounts. The industry grew through fragmentation. Most people have two or three "zombie" 401(k)s from old jobs. Rolling these into a single, low-fee IRA simplifies your life and usually cuts your costs by half.