By Amol Agrawal
It is that time of the year when people make their New Year’s resolutions. One resolution which usually tops is “I will save more”. It is interesting how this idea of saving more spread through the world thanks to two major milestones 100 years ago: the first open-ended mutual fund and World Savings Day.
The roaring 1920s led to a booming US economy and stock markets. There were concerns that American families will be drawn into feverish speculation, invest in risky securities, and lose their savings. There was a need for an investment scheme that could pool savings of households and put money in safer securities. The US had a few closed-ended funds where money could be withdrawn only after completion of the fund’s tenure.
Edward Leffler, a securities salesperson, came up with the idea of an open fund where investors could freely withdraw funds. The specialist fund manager would pick stocks and report the net asset value transparently. In March 1924, he, along with a small brokerage firm, launched the Massachusetts Investors Trust which continues till date. The rest, as they say, is history. Mutual funds as an idea was adapted across the world to channel household savings towards financial markets.
Six months later across the Atlantic, the world of savings witnessed another big moment. In October 1924, the centennial event of an Italian bank generated high response and became the first International Thrift Congress. The Congress was attended by 350 members from 27 countries with delegates declaring October 26 as World Savings Day or World Thrift Day. While the importance of savings has been known for a long time, people have been poor at it. In that sense, it was important that World Savings Day stressed the importance of local communities and financial security. The Savings Day also helped in spreading the idea of savings banks, that had shaped in Europe, to other countries.
Both the ideas of savings and mutual funds faced enormous challenge as the roaring twenties eventually gave way to the Great Depression. The economies plummeted and with it savings declined too. Mutual funds, which depend greatly on savings and financial markets, faced a grave crisis. John Maynard Keynes pointed to how the “savings paradox” where everyone is only saving and not consuming worsens the crisis. Keynes also disagreed with the classical school which said that savings lead to investments. Keynes said it is actually investments that lead to savings, setting off a chicken-and-egg problem that continues to divide economists.
While there was confusion over the macroeconomics of savings, the microeconomics — that savings is important — was clearly understood by people. As economies started recovering after the Second World War, savings came back to the fore. Governments created financial institutions and markets to channel domestic and foreign savings for development of their respective countries. Of late, we are also seeing behavioural economics and nudging being used to promote savings.
Mutual funds became even more popular due to the advent of index funds pioneered by John Bogle in 1975. The existing mutual funds tried to beat the benchmark indices, which was becoming increasingly difficult as the markets were getting more efficient. The index funds simply invested the funds into the benchmark indices. These funds merely tried to track the index and not beat it. These funds were cheaper as there was no management fee and hence created more value for money for investors.
How does this history play out in India?
Post-independence, the Rural Committee on Finance suggested that cooperatives should be used to channel rural savings and give loans for rural development. Post-bank nationalisation, the onus shifted to commercial banks for opening rural branches and providing financial aid to the rural and agricultural sectors. After the 1991 reforms, private banks, local area banks, and small finance banks came to the fore.
Amidst these banking developments to tap savings, the government also started the first mutual fund, Unit Trust of India, in 1964. In the 1980s, public sector banks started offering mutual funds followed by private mutual funds post-1991. We are now also seeing the rise of index funds. The Securities and Exchange Board of India and governments have constantly encouraged retail investors to use mutual funds to participate in equity markets.
These efforts have fructified and the Indian mutual fund market has grown by leaps and bounds in the last 30 years. The National Pension System has also benefitted from this financial market infrastructure. The government opened the Indian economy to foreign institutional investments and foreign direct investment to tap into foreign savings. Digital technology has transformed savings and mutual funds in a big way.
To sum up, it is quite remarkable how both the ideas of savings and mutual funds germinated one hundred years ago. The World Savings and Retail Banking Institute, established in the same year, recently released its centenary commemorative volume. The volume points that the First World Savings Day was presided by Benito Mussolini. It adds that in hindsight Mussolini’s presence was a stark reminder of the times where the 1920s were full of contradictions. It was about “reconstructions and crisis” amid “renewed national co-operation and rise of nationalist regimes”. 2020s sound similar, don’t they?
The author teaches at Ahmedabad University.
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