The appearance of mutual investment funds
For a long time mutual funds have been a part of the investment world. In the U.S.A. the first mutual fund was established in 1924 and was entitled Massachusetts Investory Trust. However it was very harsh time for mutual funds to obtain investors’ confidence. That decade saw one of the severe crises of the world economy. It was natural that the population with suspicion took in the propagation on a new investment idea. Besides the lack of the worked out legislation complicated the matter of the taxation one the foremost advantages of mutual funds. Nevertheless in theory the situation appears to be quite evident nowadays and the English case-law system required the worked practice. For the most part, mutual funds proposed investments into equities; as for mutual funds operating in bond markets there were few of them. Yet all of them were an appendage of Wall Street to certain times, before the eighties the world capital markets were much more affected by rich private investors and pension funds.

Right up to the fifties the advance in the mutual funds industry was a slow crawl. The adoption of the Law of Investments in 1940 and the Law of Trust in 1939 didn’t change the situation in the U.S.A. The rapid upsurge of mutual funds started in the middle of fifties. And if in 1951 they controlled $57 million deposited on 22 thousand accounts, in 1960 179 thousand accounts already contained $540 million, and by 1963 these figures increased up to $1 billion and 324 thousand accounts respectively.

However the majority of investors paid attention to mutual funds only in late seventies – early eighties of past century, when percent, which banks tendered to investors appeared so low, that it didn’t even cover the current inflation rates. However, those whose deposits exceeded $10,000 could take the money away from the banks and tie it up in state bonds that were more gainful then. Small-sized investors were deprived of such possibility. The alternative arose together with the appearance of mutual investment funds aimed at investing in foreign currencies and foreign overseas assets.

Monetary funds have created an utter furor in America. They collected investors’ money with the purpose of purchasing conservative foreign instruments that an individual investor could not acquire himself. The yield rates on these instruments accounted for up to 20 percent annually, and monetary funds gave a chance to receive these earnings practically to all investors. Before the appearance of such funds the best opportunity for a small-sized investor was a bank deposit at 5 percent annually.

The monetary funds have breathed a new life into the industry of mutual funds, which have been bearing losses for years, as many investors preferred to invest directly into stocks. The capital market was rather simple, and potential investors weren’t in need of hiring professional managers. By 1982 the monetary funds have accumulated $200 million of assets. When the market situation changed and quotations of stocks started growing many shareholders redirected at new instruments, particularly at stocks.

Within the eighties the funds of stocks made the average profit of 14.9 percent annually. And though those figures weren’t so impressive as compared to Standard&Poor's500 Index average annual growth rate of 17.5 percent the rise of the mutual fund industry have surprised many players of the capital market. In 1990 the advisers hired to scrutinize the demand for the mutual funds came to the conclusion that the general assets of the funds in the USA will rise up to $2 trillion by 1995-96 and up to $3 trillion by 2000. However even in 1997 the total assets of the American funds already approached $4.5 trillion, the total number of funds exceeded 70 thousand and the amount of shareholders made 150 million people.

Thus the funds were strongly supported by the American government. The mutual funds became the key element of the American pension system “Plan 401”. In accordance with this program a company should monthly invest some part (before paying the taxes) of personnel salaries into several investment instruments including the mutual funds. Thereby a considerable portion of investments went into the investment funds through the pension system.

As a result nowadays the mutual funds are ad verbum pumped up with money and they just predominate in the American capital market. It’s exactly they whose every step is closely watched by market participants. The mutual funds play an essential role in the markets of government bonds. The American federal and municipal authorities frequently address to funds for sale their bonds and attraction of money for long-term projects. The mutual funds are financing the American government via investments in the government stocks. The investment funds guarantee new capital inflow in the mortgage housing market. At last, the mutual funds’ investments into corporate obligations help to lower the cost of borrowings for corporations.

Regulation of mutual funds.
In the western countries the activity of mutual funds is a subject to the most rigid and close regulation. As a rule, it’s a separate body that controls the circulation of securities.

In USA the mutual funds are controlled by the Securities and Exchange Commission (SEC) on the basis of the Securities Law of 1933. This is a well-known body all over the world famous for its draconian attitude towards any violations in the field of stock exchanges and circulation of securities. SEC can even enclose a company if finds out that it has broken some rules of the stock emission or the exchange trading. The mutual funds are controlled by the commission as investment institutes, obliged to permanently inform the investors, carefully conduct the registration, take proper account of the value of assets, carry out the careful analysis of the emitter before acquiring its securities and many another things. Last years the Commission suffered a problem, typical for any controlling bureaucratic frame – it’s staff shortage. In 1993 there were 126 federal experts in the Commission who had to control 3800 security portfolios managed by the mutual funds, in other words more than 30 funds on each expert. In this connection a reasonable solution has been accepted in the Commission, from now on it will focus on 100 largest funds, thus, keeping an eye on approximately 90 percent of assets of all the funds. The remaining funds are checked up periodically.

And though it seems strange, but the funds first of all themselves benefit from the tough control. Moreover, their officials perfectly realize and in every possible way support at a political level the ultimate limitations and public control. The reason is that the activity of a mutual fund even at a maximum openness depends extremely on a degree of investors’ confidence to the fund. Therefore the tough regulation measures are the least evil as contrasted to a possibility of infiltration in this business of a swindler who would bate the confidence to all the mutual funds for many years. It is enough to give the following example, when in seventies the scandal burst in connection with manipulations of the board of one of the largest management companies in Northern America - Investor Overseas Services, which suspended this business all over the world for some years. Since then the mutual funds due to the tough measures of regulation safely survived through years when many other financial organizations shook with fever.

The similar laws, bodies and regulation measures exist in other developed countries of the West. For example in Great Britain the activities of funds that are not registered in proper way are prohibited by the Law of Financial Services (1986). Nevertheless there is a number of countries where such control is much more weak. This is a range of offshore zones where the registration of similar funds is possible (the Channel Islands, the Maine island, Ireland and some others). It is also recommended to warily engage into operations with the funds registered in countries of Latin America and Africa. The situation of funds’ regulation in Russia will be surveyed herein below.

So, as it is visible, we can call the history of mutual funds a history of impressive financial success of the new investment concept. And the history of the last 20 years, doubtlessly, is a triumph of the given investment concept.

History of development of investment funds in the Russian market.
Any financial institution can appear only in due time, when a range of potential clients is formed or at least starts to be shaped, and their views correspond to the put forward concepts. The promotion of investment services to the citizens has already been developing in our country for sufficient time to create such clients. The Banks and the Check Investment Funds (CIFs) were the first ones to appear in this market. However the CIF concept was still insufficiently familiar to the population, therefore CIFs were used basically for investing the privatization checks, which were handed to the population within the framework of the privatization campaign. At the same time almost from the very beginning the banks provided a clearly understood model of the deposit under percent. Therefore, when the banks began rendering its services to private persons, they gained considerable demand in all forms – rubble and currency deposits, savings certificates and bills of exchange.

It was far more difficult for CIFs to raise available money resources from the population, because they had to bring at once the two unfamiliar concepts home to the public: stocks and professional intermediaries. The CIFs got a perfect opportunity of active propagation due to the state support and the privatization program. The first one to spread was the concept of the stocks, i.e. investments with non-fixed income but appropriate to successfulness of the firm. Since the moment of propagation the initial stage of individual investment in stocks started to develop. It was characterized by acquisition of stocks on the check vendues and start of issuing of stocks by some companies, especially by banks. Gradually the public mind swallowed and digested the idea of a fund based on raising of assets of many small-sized investors and professional control of these assets as a unified sum. This opened ground quickly became a tasty morsel for all kinds of financial pyramids like MMM JSC, Russky Dom Selenga and others. The important feature of this stage was that, at first, these companies did not inform where they invest the raised assets and secondly, some of them did not promise to give them back at all. The events of summer 1994 have revealed it and appreciably shattered confidence of the populations to the similar companies.

The check funds had another problem, which in many respects has determined their destiny – they haven’t brought some noticeable income to shareholders in many respects because of the double taxation, i.e. two-stage "refinement" of earnings – at first, of general earnings of CIFs, and then of net profit assigned for disbursement of dividends.

Failures of CIFs (close-ended funds) were underpinned with the backwardness of Russia’s secondary stock market. Therefore it’s no wonder that their stocks appeared to be noncompetitive in terms of the liquidity and the yield in comparison with the alternate investments (e.g. the banks) because of the double taxation. After the termination of the check privatization practically all CIFs ceased new emissions of stocks.

There is also a problem of estimation of assets of check funds. The present day development of the Russian stock market stipulates that the method of the estimated value definition of investments is based upon the recognized quotations of securities. The Federal Commission for the Securities Market has obliged to apply it to mutual funds but not to CIFs. And even if we bind CIFs to act similarly, it will hardly be possible to estimate a real market value of their assets. The majority of investments of the check investment funds (i.e. shares of JSCs) doesn’t have a market quotation and is valuated under the book value.

In contrast to other forms of the collective investments, which were born in the legal vacuum, mutual investment funds were created only after the Federal Commission for the Securities Market (FCSM) had elaborated and accepted a considerable legal base for them – more than 30 statutory acts (the acts were developed since August 1955, and the first CIF appeared only in November 1996) and had tried to protect concerns of their shareholders.

In particular, the FCSM of Russia has established state control for their activities, has separated the control of assets of a fund from their storage, has organized a multilateral cross check of those organizations that are responsible for activities of CIFs, has made severe demands to the information disclosure necessary for the investors to make a reasonable resolve, has perfected the reporting system and also has eliminated the double taxation, which prevailed over the check investment funds. These features of the mutual funds are supposition to increase the investors’ confidence to this new and still unusual for many Russians financial institution.

The mutual funds have in cold blood survived through the default of 1998 – none of the CIFs operating at that moment has gone into liquidation and hasn’t infringed upon the shareholders’ concerns. This fact very eloquently testifies to the potential investors of fundamental differences and advantages of investments into CIFS against other versions. Nevertheless, it’s too early to say that services of the mutual funds have widely spread among the investors, but some positive tendencies in development of this perspective direction of investment instruments in Russia are already visible. In particular the legal base regulating activities of the mutual funds has been refreshed lately and a number of new rules and laws has been adopted as well. Only for the last year the number of the management companies and mutual funds has increased almost two times. CIFs as a perfect way to multiply and accumulation of capital become more and more popular in Russia.