How to Run a Mutual Fund
Original post by Ben Taylor of Demand Media
Operating a mutual fund tests your investment skills on a regular basis. After incorporating the fund and registering it with the Securities and Exchange Commission (SEC), a mutual fund manager enters into a fiduciary relationship with his investors, for whom it is his responsibility to make profitable investments. Raising investment capital is also an integral responsibility for a fund manager; Michael Maiello of Forbes.com writes that the cost of managing a $500 million fund is not much greater than that of running a $50 million fund, which means that a fund manager who is successful at raising capital can yield greater returns to his investors.
Solicit initial commitments to invest. Maiello quotes mutual fund manager Richard Gates as estimating a new fund's start-up costs to be between $150,000 and $225,000, though that amount would only cover the basics. The fund would need between $10 million and $15 million in initial investments, depending upon the fund's expense ratio.
Draft an investment plan that outlines how you will manage the fund. Detail the sorts of investments you plan to make, those that you will avoid as well as the degree of financial risk you will tolerate. Mutual funds primarily invest in shares of stock; your plan should disclose if you are investing in small-cap or large-cap stocks, how you hedge open positions and the minimum amount each investor must contribute to the fund.
Incorporate and register the fund with the Securities and Exchange Commission. Consider working with an investment administration to make your fund's establishment simpler. Lawyers and advisors at such administrations work directly with fund managers and other leaders to establish the required documentation for the jurisdiction in which the fund will be operated.
Continue to solicit investors to take advantage of economies of scale, because risks associated with mutual funds -- as well as the costs of operating a fund -- do not change much as the fund grows, according to Maiello. As the amount of money under your fund's management grows, so does the amount of money it returns. For example, 10 percent of $1 million is more than 10 percent of $900,000.
Research investment opportunities, then open positions that align with the fund's investment plans and the terms established between you and your investors. When you manage a fund, you invest your clients' money in several stocks and trading positions; in return, your clients have shares of the mutual fund. Mutual funds are attractive investments because they provide an investor with a diverse set of investments at a lower cost than buying stocks on their own.
Issue quarterly and annual reports to both your investors and the SEC. Reporting requirements with the SEC will vary based on the total value of assets under your management, but you should disclose the fund's performance to your clients at least every quarter. These reports should include current revenue and expenses, the types of securities in which the fund is invested, as well as projections of future performance.
Attract additional employees and investors by sharing your funds' performance and future projections. As a fund grows, it will generate enough revenue to return money to your investors, pay you a salary and hire additional analysts and managers. A high-performing fund will attract investors looking for a good return; using additional funds to hire people to help you run the fund will help you increase returns.
Tips & Warnings
- Consider establishing a hedge fund -- which is a private equity firm -- if you want to invest on behalf of a closed group of people, such as your family, close friends or business partners. Hedge funds with managed assets under $100 million do not have to report to the SEC, according to the Dodd-Frank regulations of 2010.
- "Forbes"; Mutual Funds: Economies of Scale; Michael Maiello, February 2009
- Nottingham Investment Administration; Fund Administration, 2008
- SEC; Invest Wisely: Mutual Funds; July 2008
- SEC; Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010
About the Author
Ben Taylor has been writing since 2005 and has had work published by WEKU-FM and West Virginia Public Broadcasting both on air and online. Taylor holds a Master of Arts in English from Eastern Kentucky University and currently teaches composition and ESL there.