A Guide on Mutual Funds

Updated on Thursday 27th July 2023

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A mutual fund is a type of investment vehicle in which the investors pool their financial assets in order to perform investment strategies that will provide a high return on investment. In a mutual fund, the investors will generally invest in stocks, bonds, money market instruments and other similar financial assets. Investors interested in setting up an investment fund as a mutual vehicle will need to appoint a manager, who will be in charge with investing the fund’s capital. Below, investors can read more details on the main characteristics of a solid mutual fund.

Quick Facts
Characteristics of mutual funds	Often used for retirement and long-term investments, they operate as companies pooling money from investors, investors do not own the assets they invest in directly.
Categorization	Mutual funds can be categorized as active and passive.
Types of mutual funds	- index funds; - exchange-traded funds; - stock funds; - balance funds; - bond funds; - money-market funds.
Structures available for opening mutual funds	Open-ended and closed-ended structures can be used to create mutual funds.
Types of investors addressed	Mutual funds are available to individual and large investors.
Possibility to operate a mutual fund outside its home country (YES/NO)	Yes, it is possible, however, specific requirements must be met in this sense.
Assets to invest in	- bonds; - equity; - securities, etc.
Capital requirements	The capital requirements are established on a country-to country basis and the type of entity used.
Management requirements	Investment companies
Audit requirements (if any)	International Financial Reporting Standards (IFRS)
Ways to obtain profit from mutual funds	The profits of a mutual fund can come in the form of dividend payments, capital gains, and net asset value.
Safety of investing in mutual funds	Mutual funds are considered safe/low-risk investment options.
Taxation of mutual funds	Mutual funds are taxed in accordance with the legislation of the countries they are set up in.
Advantages of mutual funds	- diversified portfolios of investment; - easy access as they are traded on large stock exchanges; - they are professionally managed funds, etc.
Popular countries to set up mutual funds in	Luxembourg, Ireland, Singapore, Hong Kong, the USA, the Netherlands.

The most common features of mutual funds across the world

Mutual funds can take the form of open-ended or closed-ended structures depending on the country they are set up in. They are also governed by other characteristics, such as:

they can consist of a portfolio of stocks, bonds, or other securities;
they address non-professional investors who can access diverse, yet professionally managed portfolios;
they are divided into several categories that describe the different types of securities, investing goals, and return types;
their return is impacted by annual fees, cost ratios, and commissions.

One of the most common types of mutual funds is the retirement plan used by employers as an investment tool.

If you wonder how to start a hedge fund and if the mutual fund is a suitable option, it is worth noting that the former is a high-risk type of vehicle which is why it is not recommended for this purpose.

Types of mutual funds

There is a wide variety of mutual funds that can be developed in countries all over the world. These are divided into:

stock or equity funds that are further divided into sub-categories based on their size and which can be small, mid or large-capped;
bond funds that usually invest in debt financial instruments owned by the government or corporations;
index funds, some of the best known are Dow Jones and S&P500;
balanced funds that usually invest in hybrid assets, which can include stock and bonds alongside alternative investment instruments;
money-market funds that are some of the safest types of mutual funds;
income funds that are employed to generate a steady income on a regular basis;
international or global funds that are used to operate only outside the country of origin, which may also be the case of the Cayman Islands through the SPC (segregated portfolio company);
specialty funds that invest in specific industries, such as the financial and healthcare ones;
exchange traded funds (EFTs) which are mutual funds per se, but they use similar investment strategies to the latter.

Given the plethora of mutual funds available, feel free to explore more information about them in our magazine.

Who can invest in mutual funds?

Mutual funds address small and/or individual investors who have access to professionally managed portfolios, which is one of the greatest advantages of such investment vehicles. As a result, each shareholder participates proportionately in the fund's profits or losses.

Mutual funds can invest in a wide variety of assets, and their performance is usually verified through changes in the fund's overall market capitalization. Compared to other types of funds, these are safer by means of the assets they invest in and the access to professional advice investors benefit from.

Such funds are popular in many jurisdictions, each with its own requirements. However, it is important to note that these are harder to operate under the same structure in multiple countries.

Fund management team

Businessmen interested in how to start a fund must know that one of the most important characteristics of the mutual fund refers to the fund management team or, depending on the case, the fund manager. As mentioned above, the fund manager is responsible for performing investment strategies that will always have a direct impact on the fund itself.

There are also other types of entities that can be used for the creation of various types of funds. For example, the segregated portfolio company in the Caymans is very suitable for various operations. If you want to use this type of entity, our affiliates can advise on its main uses and advantages.

A clear investment strategy

Regardless if the vehicle is incorporated as a hedge fund startup or as a mutual fund, the investment strategy is a vital instrument when performing investments in a specific jurisdiction. The most well-reputed mutual funds have grown over the years due to the investment strategies chosen by the fund’s investors.

In this sense, it is necessary to establish an investment strategy and business goals, depending on the characteristics of the market in which the fund operates.

Low expenses when setting up an investment fund as a mutual fund

One of the top traits of a successful mutual fund aims at the value of the expenses carried out through the respective fund. It is important to know that several studies have shown that the investment funds which had a lower value of expenses had better financial results than in the case of the funds in which the expenses were higher. At the same time, low expenses have a positive impact on the fund in the long run.

Also, it is recommended to hold a large value of assets, but the value of the assets should generally be kept below $ 1 billion, as from this level, it may be more difficult to perform solid management strategies.

What are the most common mutual fund jurisdictions in the world?

Mutual funds are widely spread around the world, in Europe, North America, and even Southeast Asia. Here is also some information on their number in some of the most popular destinations at the level of 2020:

Luxembourg was the country to hold assets held by mutual funds with a total percentage of 8330.59
Singapore ranked second with a percentage of 998.32;
Ireland ranked third in holding assets with a percentage of 957.79 of the world’s total value;
Hong Kong, Australia, and the United States are also among the top-ranking countries with large percentages of assets held by mutual funds.

Businessmen are invited to contact our team of affiliates for more details on the mutual funds.