but the principle of pooling money in order to spread risk remains the same as with the larger funds. Of course, mutual funds can also be purchased by large institutional investors, such as pension funds, which can affect the dilution effect for individual investors ().
The earliest type of mutual fund in the United States can be traced to Dutch, English and Scottish investment trusts which helped finance America's railroad industry and provided farm mortgages just after the Civil War. This financing helped the nation emerge as a significant industrial power, but the funds were essentially investment vehicles for wealthy Europeans.
In the beginning of the twentieth century, American versions of these European trusts began to make their appearance, financed in part by J. P. Morgan and others of that class and profession. These were closed-end trusts, meaning that there were a limited number of shares which could be issued, which had names such as Shenandoah Corporation and Blue Ridge Corporation. These funds became popular during the early decades and generated a number of imitators during the Roaring 20s, a decade which saw significant growth in the stock market. During the 1920s, many of these funds took highly leveraged positions which was acceptable so long as the market continued to rise, but which made the funds particularly vulnerable to downturns in the market. Funds (and investors) who were not highly leveraged could "ride out" a downturn in the market, but those funds which had high levels of leverage would have to absorb the losses. When the market crashed in 1929, a great number of these funds also simply vanished.
The mutual funds which are popular today are not descended from these closed-end trusts, however. Today's funds are based on the open-end investment companies which would sell an unlimited number of shares. These funds survived the stock market crash of 1929 better than the closed-end funds sinc...