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Definition: Non-Publicly Offered Mutual Fund
Non-Publicly Offered Mutual Funds are investment options which are not open to sale for everyone. There are some requirements like income, total assets etc which are considered before allowing people to make investments.
There are broadly 3 types of mutual funds that are namely:
• A public fund - an international mutual fund which is neither a private or professional fund
• A private mutual fund - one whose shares are not offered to the general public but to specified persons.
• A professional fund - made available only to professional investors wherein initial investment in is not less than $100,000.
They are also known as private mutual funds.
Generally, mutual funds not sold to the public are known as private or non-publicly offered mutual funds. These funds are usually offered to selected few accredited investors(‘sophisticated investors’) such as banks, Venture capital firms, and High Net Worth individuals. They are offered to select subscribers by reason of a private or business connection between the promoters and investors. A non-publicly offered or private mutual fund can have as few as 15 investors and not more than 250 investors in the US.
Features of Non-publicly offered mutual funds
• Non publicly offered mutual funds are exclusive investment vehicles with a limited number of investors.
• Since these are private placements, private mutual funds don’t have to be registered with the regulator, SEC(Securities Exchange Commission, in the US).
• Due to smaller number of investors, there is usually little or no government regulation.
• A significantly larger initial investment is usually required, with a higher return potential.
Public and non-publicly offered mutual funds – A comparison
• Expenses of private mutual funds are not computed and deducted in a similar manner as publicly traded funds.
• The minimal eligible investment for an unit of a private mutual fund is comparatively much higher than that of a public mutual fund.
• Private mutual funds, tend to be more leveraged than public mutual funds, i.e it is common for these funds to use methods like derivatives, repurchase agreements and other borrowing techniques.
• Public mutual funds are freely available to the public, allowing retail and smaller investors without specialized knowledge to invest without substantial risk. Most public mutual funds are “open end” funds, meaning that they are open to subscribers in the course of their operation, and don’t have a set amount of capital. Private mutual funds are selectively available.
• Public mutual funds must meet strictly, stringent regulations of the Securities and Exchange Commission (SEC) in the US, whereas it is not the case for private mutual funds. Private or non-publicly offered mutual funds are not as highly regulated.
• The potential payoff for private mutual funds is much greater compared to public mutual funds.
Advantages of Non-publicly offered mutual funds
• For a HNW (High Net Worth) Individual, the major benefit is the comparative lack of regulation.
• Reduced regulation causes greater investment risks, but also increases potential for better investment rewards in the short and long term.
• In some nations, non-publicly offered mutual funds turn out to be tax efficient collective investment entities. This is because each nation offers concessions and benefits for private mutual funds.