What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Can Anyone Create a Mutual Fund?

Original post by Dennis Hartman of Demand Media

Mutual funds pool together stocks and other securities, giving their investors access to a variety of assets and creating profits for their managers, who charge fees to fund investors. Just as anyone can start a small business, almost anyone is free to create a mutual fund. However, the financial costs and complexities of mutual fund creation and regulation make this step prohibitive for all but a few would-be fund founders.

Process

Anyone who files the appropriate registration paperwork and meets with basic guidelines can create mutual funds. On the federal level, the Securities and Exchange Commission requires mutual fund managers to register as investment advisers. A fund's investment advisers operate independently of the fund itself, in terms of legal status, but handle the investment decisions that affect how a fund operates. Each state also has its own regulatory laws for mutual fund managers and founders that require additional registration documents and fees.

Costs

Only individuals or entities with sufficient funding can create mutual funds. According to "Financial Advisor" magazine, the typical start-up costs for a mutual fund in its first year can total $150,000. This leaves wealthy individuals and businesses as the only groups that can create mutual funds without financial assistance. Others who wish to create mutual funds can borrow the money needed to start funds or charge high initial fees to their first investors.

Personnel

A mutual fund requires a staff to perform administrative functions, which means that even if a person creates a fund, she will need others to help operate it. Some mutual funds are corporations, which requires them to have boards of directors, external investment advisers and officers. Others are business trusts, which need trustees to establish themselves and begin operating. In each case, a mutual fund founder needs to solicit investors who provide the money to purchase securities, which gives a fund its value.

Getting Help

Prospective mutual fund founders and managers who lack the resources to start their own funds can take advantage of the services of private firms that supply assistance with registration, administration and funding a new mutual fund. These firms charge fees for their services but can help existing financial companies branch out into mutual funds or get new mutual funds off the ground. In cases of mutual fund founders who seek this type of assistance, only those who meet with a firm's approval by submitting solid business plans and showing evidence of the skills needed to manage successful mutual funds can create new mutual funds.

                   

Resources

References

About the Author

Dennis Hartman is a freelance writer living in California. His work covers a wide variety of topics and has been published nationally in print as well as online. Hartman holds a Bachelor of Fine Arts from Syracuse University and a Master of Arts from the State University of New York at Buffalo.

Advertisement