Historically, American investors plowed all their money into mutual funds. Instead of trying to play the markets themselves, they handed the responsibility over to professionals, hoping that they would do a better job.
Unfortunately, mutual funds aren’t cheap. The average fund charges its clients 2 percent of the value of their stock portfolio every year – which seriously adds up over time.
The good news is that you don’t have to put up with this sorry arrangement. You can set up a mutual fund yourself. But how? That’s the topic we address in this post.
Define Your Strategy
If you have some capital in the bank, you can set up your mutual fund immediately. Start by researching the stocks you want to buy (preferably more than 30) and then allocate your funds accordingly. Next, give your allocation a name so that people will recognize it – something along the lines of “Big 30.” You can then market your portfolio and encourage other investors to get in on the action.
Just choosing a bunch of stocks at random, though, probably isn’t the best approach. Money managers typically use their stock allocation strategy to justify why investors should keep their money in the fund.
For this reason, you’ll want to focus on some sort of niche. Obvious ideas include things like investing in specific sectors or only in small-cap stocks. Less obvious ideas include things like only investing in firms with low P/Es or targeting companies that have momentum.
Make Sure That You Comply With Standards
The next step is to ensure that your mutual fund complies with all ethical and regulatory standards. Getting GIPS consulting can show you how to report your figures in a way that is comparable to other investment vehicles.
Determine Your Fee Structure
Next, you’ll want to figure out how you’ll get paid. Traditionally, equity managers charged 2 percent per year, but you might want to change this, depending on the type of work that you do.
If you charge 2 percent, you can expect to earn around $20,000 for every $1 million that you raise. If you can raise $100 million, you’ll make $2 million per year in fees.
Always publicize the performance of your portfolio. If you can demonstrate an ability to beat the market long-term, you will attract ever-increasing sums of money.
You can choose different fee structures too. For example, you may not charge investors if the rate of return is less than 5 percent in a year.
Raise Capital
The biggest challenge of setting up an investment firm is to raise the initial capital. Before you have a track record, you need to convince investors to join you.
First, you’ll want to receive a formal severance letter from your former employer that doesn’t rule out setting up a mutual fund. This gives you permission to start an investment enterprise and also includes critical details about your previous work.
You’ll also need to focus on your marketing strategy: how precisely will you convince investors to join you?
You might also appeal to institutional investors, such as sovereign wealth funds, selling your strategy to them before going after private individuals.
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