How to Create a Mutual Fund

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Since the 1980s, mutual funds have exploded, going from only a few thousand to tens of thousands. A mutual fund is a collective of investors, who pool their money with a manager to get the most out of their investment money. A mutual fund manager takes their money and invests it in different types of securities with the hopes of turning a profit. Creating your own mutual fund requires a considerable amount of experience with investing.

Things You'll Need

  • Prospectus
  • Annual report

Creating a Mutual Fund

Determine the type of a mutual fund you want to create. The Securities and Exchange Commission (SEC) requires that the name of your mutual fund describes what you invest 80 percent of your funds into. So, if you name it Johnson Pharmaceutical Fund, that means 80 percent of your funds invest in different pharmaceutical companies. If you name it Smith Stock Fund, that means 80 percent of your funds are invested in different stocks. Pick an area that you, as the mutual fund manager, will be most experienced with.

Register the mutual fund with the SEC. They require that each mutual fund is registered so they can keep track of what is going on. More importantly, this registration requires that you follow rules. The SEC wants mutual funds to be transparent so investors don't get scammed.

Determine what type of fees you're going to charge. Commonly, the type of fee that is charged is a load fee which is where you pay a percentage of your purchase. If an investor puts $2,000 into your mutual fund and you charge a 5 percent purchase fee, they are only getting $1,900 invested in the mutual fund. The other $100 goes toward paying the manager and keeping the fund afloat. Another type of fee is an account fee, where the manager charges a fee if the total investment for a single person drops below a certain level of money.

Regardless of what type of fees you decide to charge, the SEC allows only 8.5 percent of the total transaction to be a fee, so spreading it out across different types of fees is one strategy, or charging one lump sum is another strategy.

Prepare your prospectus. This is a document that the SEC files for any investor to see. In the prospectus, the manager explains what the objectives are, what investments they will put their money in, what risks there are, what fees there are (there are always fees) and the management. An investor deserves to know not only what you plan on investing in, but also, what experience you have as an investor.

Start courting investors. You want to demonstrate to them that your mutual fund is going to be an effective and worthwhile investment. This means sitting down with individual investors (big-ticket ones) and explain why you're a worthy investment, but more importantly, why this mutual fund, unlike all the others, is the right one to work with. Often, this is the most difficult step because it requires the person to be confident and knowledgeable about their service. However, this is where the mutual fund truly comes to life.

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