How to Start a Private Mutual Fund

By: Terry Lane | Reviewed by: Ryan Cockerham, CISI Capital Markets and Corporate Finance | Updated January 28, 2019

Starting a mutual fund requires getting government approval and attracting millions in investor capital.

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A mutual fund is a financial services business, and starting your own is a lot like launching any startup company. In addition to getting approval from government regulators, the owners of a mutual fund company must also raise funding, pay fees and manage operations.

Much like any other form of business, running a successful mutual fund company requires keen awareness of the multi-faceted nature of the financial services industry, as well as the stringent regulatory requirements that are an integral part of this operational environment.

Tip

If you are planning on starting a private mutual fund, you will need to first gain approval from the Securities and Exchange Commission. After approval is granted, you will need to ensure that you have the necessary operating capital to sustain your operations.

Exploring Investment Companies

Mutual funds are special investment companies registered with the Securities and Exchange Commission. The SEC applies strict rules to mutual funds, including requirements to make some information publicly available and maintain enough capital to cover investors cashing in shares. To start a mutual fund, you’ll need to set up a corporation, which can be any type, including a limited liability company, or LLC.

Once incorporated, your company can apply with the SEC to run a mutual fund using Form N-1A. In order to successful complete Form N-1A, prospective fund owners must supply a wide variety of information, including the names of principal underwriters, management services, and any businesses connected to the fund itself. If the application is approved, your company will become a regulated investment company.

Defining The Role of the Investment Manager

To manage a mutual fund, you’ll have to be approved for institutional investment management by the SEC. You can register with Form ADV, which can also be used to meet some state registration requirements. On Form ADV, you will disclose the size of the portfolios you will manage. Institutional investment managers who oversee a portfolio of $100 million or more must file a Form 13F, which details the fund’s portfolio transactions and value.

Assessing Funding and Fees

While fees and operating costs are part of running a mutual fund, the biggest expense for a startup mutual fund is attracting investor funds to build a portfolio. A fund can be started for as little as $25,000 in startup costs, which includes legal costs and government fees, but it needs a portfolio of at least $8 million to become profitable, according to "Forbes" magazine. Yearly operating costs for a mutual fund can average $150,000 to $225,000 "Financial Advisor" magazine reports.

Evaluating Mutual Fund Shared Trusts

To ease startup and operation costs, mutual funds can partner with a shared trust, which provides a board of directors, insurance, regulatory compliance and oversight. These services, offered by companies like Gemini Fund Services LLC and Direxion Funds, help small and midsized funds be more competitive while allowing the mutual fund managers to make their own investment decisions. Another option for operating a mutual fund is to buy the management rights to an existing fund, which The Trust Adviser website reports would cost about $350,000 for a fund of $10 million.

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About the Author

Terry Lane has been a journalist and writer since 1997. He has both covered, and worked for, members of Congress and has helped legislators and executives publish op-eds in the “Wall Street Journal,” “National Journal” and “Politico." He earned a Bachelor of Science in journalism from the University of Florida.

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