Morningstar Advisor - April/May 2011 - (Page 16)

Know-How How to Start a Mutual Fund By Melinda Gerber It can be expensive, but managing your own fund has plenty of rewards. How much does it cost to start a mutual fund? In general, a plain-vanilla, domestic-equity fund can cost anywhere from $50,000–$150,000 to start. If you have something more unique or specialized, bump up the numbers to account for additional costs. Still interested? Follow these steps. 1 Get Legal Two main legal tasks exist for creating a mutual fund. First, establish the business structure. Either form a corporation or a business trust. At its heart, a mutual fund is a creature of state law and must be organized under it. Next, you must comply with federal securities laws. A mutual fund must file Form N-1A. This behemoth document registers the investment company under the ‘40 Act and registers its shares under the ‘33 Act. Market continuously and consistently. One news release or one TV appearance will not attract a crush of customers. 4 Secure Shelf Space Shelf space is your fund’s distribution channel. Whether the fund is bought directly or through a fund supermarket, wirehouse, or brokerdealer platform, potential investors must have a way to purchase your mutual fund. Your potential investors define your distribution channel. For example, if you target registered investment advisors who trade through a No-Transaction-Fee fund supermarket, then your fund better be available through that supermarket. If your fund is not available where your customers shop, it creates a barrier to purchase. It is crucial to be in the right place. Make your fund easy to buy. Now, selecting a shelf and being accepted at that spot are two separate things. Securing shelf space is difficult. Once you have begun the registration process with the SEC, contact the shelf-space decision-makers. Use marketing to convince them that they would be wise to offer your fund. Managing an open-end mutual fund has awesome responsibilities and rewards associated with it. You get paid for doing something you love and have a positive impact on those who invest with you. If you can do it a little differently or a little better, then jump in. Those who have come before you have been passionate and committed. Join them. To your success! Melinda Gerber is the author of How to Create and Manage a Mutual Fund and ETF (Wiley, 2008). 3 Assemble Your Team Service providers (transfer agent, shareholderservicing agent, fund accountant, fund administrator, custodian, attorney, independent auditor, and distributor) keep your fund running smoothly. Whom you choose can make or break your fund, especially if you have a small asset base. Prices for these services range dramatically. Interview several providers and don’t base your decision on whether a service is used by a fund you admire. Your fund probably has different needs. Find out whether your fund will be the small fish in the pond. If you are a little fund, you want to find someone who is responsive and sensitive to the issues that affect a small fund. On the flip side, do you want to be a service provider’s biggest client? Ask for names of current clients and their asset size. Determine how you would fit into the provider’s mix. Also find out if the provider has been with a small fund that has grown larger. Ask for references. Ask them whether the provider was patient and worked with them as they grew into a higher-margin client. Ultimately, you want partners, not independent contractors. A group of individuals out for themselves is not as strong as a group linked together. Look for people who have the requisite skills, possess similar goals, and with whom you enjoy a level of trust. 2 Develop a Marketing Message Don’t depend solely on your fund’s future performance to attract assets. Smart money managers create marketing strategies highlighting their fund’s message. Your fund’s message is the reason people will invest in your fund and not the dozens of others just like it. Establish your fund’s uniqueness in a few clear sentences. Your message must fill needs. Let the shelf space decision-makers know why they should add your fund to their already-bulging shelves. Tell the media why your story will attract an audience. 16 Morningstar Advisor April/May 2011

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2011

Morningstar Advisor - April/May 2011
Letter From the Editor
The Debate That Matters Most
What Can the Mutual Fund Industry Do Better?
Cool Logic, Warm Intent
How to Start a Mutual Fund
Owner and Operator
Middle East Revolts Roil Oil Markets
Four Picks for the Present
Investment Briefs
How We Improve Our Odds of Picking Outperformers
Health Care Survived 2010, but Investors Want Proof
The Global Fund-Leadership Playoffs: Europe vs. the United States
U.S. Fund Investors Have It Good
U.S. Fund Firms Learn to Speak UCITS
Balancing Act
The Tamer Ride
Investors Lend a Hand
Healthy, Wealthy, and Wide
Foreign Funds That Win at Concentration
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VAs Finish 2010 With a Solid Gain
Buying Good Funds, Poorly

Morningstar Advisor - April/May 2011