A mutual fund is an SEC-registered investment company that pools assets from multiple investors, known as shareholders, where professional money managers deploy the collected capital across a spectrum of investments with an eye toward generating future investment returns (which, of course, are not guaranteed). While mutual funds predominantly invest in traditional securities like public equities and fixed-income instruments, they may also invest up to 15% of their money in illiquid assets, which may include private companies 1.
What is a mutual fund investment in private companies?
A mutual fund investment in private companies is simply when a mutual fund deploys a portion of its capital to private companies, I.e. companies before they go public through an initial public offering (IPO).
How to invest in a mutual fund?
Through a Financial Advisor or Broker
An investor may gain access to mutual funds through financial advisors—professionals who provide clients with investment expertise, or through brokerages—firms that act as intermediaries between investors and securities exchanges. One potential advantage of investing in mutual funds through financial advisors and brokers is the broad universe of mutual fund choices these investors may be able to access through these service providers. However, this can be an expensive approach to accessing this asset class.
Financial advisors often receive fees, which are fixed percentages of their clients' mutual fund investments. They also collect money from front- or back-end loads, which are fees funds charge investors when shares are bought or sold.
The costs of investing in mutual funds through brokerages can also add up, because such accounts may charge transaction fees for each trade (though this is increasingly less common) --in addition to potentially other fees.
Directly with the mutual fund company
Investors may invest directly with a mutual fund company, whether it's a large investment house or a boutique shop. But the application methodology depends on an investor’s preference. Traditionalists seeking human contact can fill out an application at the purveyor’s nearest brick-and-mortar branch office, as long as they remember to bring essential documents such as proof of identity, a recent photograph, and a voided bank check. Contrarily, tech-savvy investors can directly invest with a mutual fund company online via their laptop, tablet, or smartphone.
Through a retirement fund
Investors may access exposure to mutual funds by participating in employer-sponsored retirement plans like 401(k)s or 403(b)s. In fact, the vast majority of such plans allocate more money to mutual funds than to individual stocks and bonds.
Alternatively, individuals may seek to build their nest eggs by accessing mutual funds through tax-advantaged individual retirement accounts (IRAs). These vehicles may be useful for self-employed people who do not have access to employer-sponsored retirement programs. But – as with any investment choice – there are tax and early withdrawal implications, among other things, to consider before investing through an IRA.
Those interested in opening an IRA may do so through Forge Trust, using its online wizard, DocuSign, or application download functions.
Do mutual funds have investment minimums?
This would vary depending on the specific fund. While some funds have $0 minimum requirements, others require minimums that could range widely (I.e., one fund could have a $500 minimum while another could have a $5,000 minimum). Investors should check with each vendor individually before each trade, because the policies may suddenly change at any given fund house.
Mutual funds, including those that invest in private companies, pool money from groups of investors and use that capital to invest in businesses. Those that do choose to invest in private companies are using some of that capital to invest in companies before the companies go public. Forge unlocks insights into thousands of startups to help mutual fund companies and institutional investors better understand the market for private companies.