Since almost 75 percent of all mutual funds fail to surpass the S&P 500 return each year, many people wonder what it would take to start a mutual fund because they believe they can do better than most of the current mutual funds. There are many requirements that a mutual fund must fulfill before it is able to sell the first share of its new fund. Failure to perform the necessary steps can result in the Securities and Exchange Commission (SEC) shutting down your new mutual fund. Here are the steps you need to complete in order to start your own mutual fund.
Step 1. Incorporate a Management Company
The first step is to decide on the name of a management company that will be overseeing your mutual fund. Once you have a name, you must incorporate your business in a state. Your new management company cannot be incorporated overseas, as foreign companies are not allowed to register with the government to sell investment securities. The requirement to incorporate in a state will be outlined by that state’s Secretary of State’s office.
Step 2. Register with the Government
Your management company must be registered with the SEC under the Investment Company Act. There are many forms required to register with the SEC. The number and type of forms needed for registration is determined by the type of service your mutual fund will be providing. The necessary forms can be downloaded from the SEC’s website. These forms must be filed electronically.
Step 3. Pay Registration Fee
There are fees that must be paid to the SEC when you register your new mutual fund. The amount of the fees is determined by what type of securities you will be offering. Some fees are required to be paid at the time of registration, whereas other fees are required to be paid before your mutual fund starts operation.
Step 4. Capital Requirements
Now that your new mutual fund is registered with the government, you must meet minimum capital requirements. The mutual fund will not be allowed to sell its first share until it has met this requirement. The capital requirements must be owned and managed by your management company. Monies that are loaned or borrowed cannot be used in meeting the capital requirements. The principals of the management company or the management company itself must control the money that is pledged in meeting the capital requirements for starting a new mutual fund.
Step 5. Create Prospectus
Every mutual fund has a prospectus that is given to prospective investors. The prospectus details the investment strategy of the mutual fund, costs of investing in the mutual fund and details of the management team. Potential investors will use the information presented in the prospectus to determine whether to invest in your mutual fund. Every potential investor must initially receive the prospectus before she is able to purchase shares in your mutual fund.
Step 6. Sell Shares
Potential investors that want to invest in your new mutual fund do so by purchasing shares. The mutual fund will have a limited number of shares that it is able to sell. Once investors purchase shares, they own part of your mutual fund. The sale of shares is income to your new mutual fund.
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