The primary principle underlying the formation of the mutual funds was that a single person could focus and handle the investments of huge amount of money from various investors. In the old days, prior to great depression mutual funds were also known as investment pools and mutual fund managers were known as pool operators. The bull market of 20s produced the economic boom that was similar to the situation of 90s. It was at this time the idea of the pyramid scheme first conceived.
The pyramid scheme was discredited in 1920 with the arrest of Charles Ponzi for giving untenable returns on postal certificates. This caused massive losses to the investors who fell for the Ponzi’s well-planned fraudulent job and his name got associated with this type of jobs. He earned massive profits by purchasing the postal certificates in Europe at reduced price and then selling them for high price in the US. Sadly, people never considered the idea of the investment pool as the latest type of Ponzi scheme.
Investment pools were finally considered by people as a type of fraud. This is because a pool operator had the authority to rob the people. Instead of protecting the interests of the investors, the pool operators indulged in risky investments since they did not own the money. Their fees were quite high. So when the stock market crashed in 1929, the people understood that investment pools were a big scam perpetuated on the unsuspecting public.
The pool managers misused the system to such an extent that ultimately the Security Exchange Commission (SEC) was formed mainly to check these conmen. The SEC managed to close down the more obvious scams. This made the securities industry change tacks and they introduced the investment pools as mutual funds to lure gullible public back in their grip.
Try to stash away your money in an indexed mutual fund if your 401(k) provider allows it. An indexed mutual fund tracks a stock market index like the S&P500 to inform you about the stocks purchased. The Vanguard 500 (VFINX) is the largest and oldest indexed mutual fund.
The cash held by the fund is divided to try to track the index to the closest possible degree. Also there is no fund manager involved in the fund to rob you of your retirement savings under the guise of fees.