According to K. Geert Rouwenhorst, in his paper, The Origins of Mutual Funds, the concept of an investment fund is dated to Holland in 1774 when â€œthe Dutch merchant and broker Abraham Van Ketwich invited subscriptions from investors to form a trustâ€¦ to provide small investorsâ€¦ an opportunity to diversify.â€(1) This occurred in Europe at the time of the credit crisis of 1772 when over-valued stocks crashed the stock market. Ketwichs clients suffered massive losses in investments in the English East India Company, and the entrepreneur in Ketwich saw an opportunity. He created an investment fund with several share classes that invested in 10 categories of securities to diversifying the fund. Ketwichs diversification strategy focused on bonds and the predecessors to mortgage-backed securities. He omitted equity investments for being too risky. When war broke out in Europe in the 18th century, the Dutch economy suffered severely, and the fund failed. The lack of equity investments left investors owning nothing but bonds that couldnâ€™t payout.
The fund strategy is the same today: provide diversification to minimizes risk.
In our next article, we will answer if it is beneficial to diversify your portfolio?
1. Rouwenhorst, K. (2008). The Origins of Mutual Funds. WP1995-03-01_01316.