Index Mutual Funds: A Silent Revolution

In the last 50 years, they have helped democratise capital markets by providing low-cost options to general investors

- AMOL AGRAWAL

IN 1975, JOHN Bogle established Vanguard Mutual Fund which offered a new style of investing: index mutual funds. Since then, index funds have transformed the world of personal investments. Although the first mutual fund (MF) to avoid "putting all eggs in one basket" shaped in 1924 (rb.gy/3g51ra). In the 50-year gap between the first MF and the first index fund, we see the development of economic theory around index mutual funds.

In 1950, Harry Markowitz in his doctoral dissertation showed that a diversified portfolio of uncorrelated securities had lower risks than one high-return security. Thus, if one combines high-return uncorrelated securities in a portfolio, one does not achieve high returns but is at lower risk as well. Interestingly, Markowitz's doctoral committee that included Milton Friedman opined that the dissertation was not economics, mathematics, business administration, or even literature. Portfolio management was not a subject then. After much anxiety and deliberations, Markowitz was awarded a doctorate in economics, noting the work was seminal. The committee's decision was proven right as Markowitz was awarded the 1990 Nobel Prize in economics along with William Sharpe and Merton Miller for their work in financial economics.