Mutual funds have become an increasingly popular investment for Americans who wish to save money for retirement or desire to achieve other financial goals. Not all mutual funds are the same, however. Some are sold to all investors through the public stock market, while other mutual funds are private.
Mutual funds are comprised of money pooled from many investors seeking the security of diversification in a variety of assets such as stocks, real estate and bonds. Investing in a basket of securities is less risky, but the downside of this is lower returns. A basket of securities is called a “portfolio.” If you invest in a mutual fund, you can usually invest a small amount – as little as a few hundred dollars – to begin building your own diversified portfolio, according to CNN Money. Your proportionate ownership of the holdings in the mutual fund is called a share, and it’s similar in principle to a share of stock.
Private Mutual Funds
Mutual funds that are not sold to the public are called private or non-publicly offered. These mutual funds are typically offered to a handful of accredited investors such as banks, venture capital firms and wealthy individuals who are classified as “sophisticated” investors. A private mutual fund can have as few as 15 shareholders. Because shares are not offered to the public, these securities don’t have to be registered with the Securities and Exchange Commission. A large initial investment is usually required, with a corresponding potential for higher returns. To invest in a private mutual fund, you will need to meet certain income and net worth requirements.
Public Mutual Funds
As you would expect, public mutual funds are available to the public. They allow smaller investors who don’t have specialized knowledge of specific markets to invest without a high concentration of risk. Most public mutual funds are “open end” funds, which means that they don’t have a set amount of capital; the number and cost of shares may fluctuate over time and the fund managers can issue new shares every day. Other mutual funds are “closed-end” funds: they have a limited number of shares, and investors who wish to liquidate their holdings do so by selling their shares to other investors. A public mutual fund must meet stringent regulations established by the Securities and Exchange Commission.
The Takeaway Message
Private mutual funds aren’t as highly regulated as public mutual funds are, and they don't provide much information to outsiders. Those who invest in a private mutual fund are assumed to have sufficient knowledge of the possible risks and therefore don’t receive the same level of protection as small investors in a public mutual fund. The potential payoff for the larger initial investment and higher risk is larger returns.
- CNN Money 101: Basics of Investing in Mutual Funds
- Investopedia.com: Non-Publicly Offered Mutual Fund
- Georgetown Trust, Ltd.: The Mutual Fund Act of 1999
- Investopedia: Public Offering
- U.S. Securities and Exchange Commission: An Introduction to Mutual Funds
- Investopedia: Private Placement Definition
- Fourteenth Meeting of the IMF Committee on Balance of Payments Statistics: Mutual Funds and Fund of Funds: Portfolio Investment or Direct Investment?
- PhotoObjects.net/PhotoObjects.net/Getty Images