How To Start An Investment Fund With Friends | 7 Steps With Details

Start An Investment Fund With Friends

An investment fund is mostly known as an investment club and it has been around for several years. It’s a new way of collecting funds and investing together. A prime example of an investment fund is a mutual fund. An investment fund consists of a group of investors who collectively invest in stocks and bonds. So the main purpose of an investment fund is to make money together. If you have a large group of friends and want to open an investment fund then read the full article to gather an insightful idea about how to start an investment club with friends.

There are few pre-requirements of forming an investment club like the number of members should not exceed 50 and there should be 12,000 dollars in assets under management. If you can fulfill both the requirements then you can start making a list of friends who might want to join the club. Once the members are fixed you have to create a structure for the investment club. Then you have to set up club rules and laws and establish a general agenda before investing in stocks, bonds, etc.

What Is Investment Fund?

What Is Investment Fund

An investment fund is a way of creating a supply of capital that belongs to a group of investors. The main purpose of an investment fund is to inherent advantages of working as part of a group. You can enjoy the likes of reducing the risks of the investment or invest in large bonds or stocks. Moreover, an investment fund offers a broader selection of investment opportunities and lower investment fees that an investor might not be able to do on his/her own. Some common examples of investment funds are mutual funds, exchange-traded funds, money market funds, and hedge funds.

Advantages Of Investment Funds

Advantages Of Investment Funds

The popularity of investment funds is rising very rapidly because of their numerous benefits. Some key advantages of investment funds are – 

1. Investment funds allow investing across a wide variety of assets and minimize the investment risk

2. Group investments give diversification so you can have a diversified portfolio

3. Having a large fund means you have the power for investing in large stocks, bonds, or large projects

4. Consolidating investments can avail lower transaction costs and benefit from volume rebates on trades

5. Investment funds can allow you to hire a dedicated manager and receive the benefit of the skills and risk management oversight

6. Employing a fund manager can also improve the due diligence and the asset selection process which is not available for personal investment

7. Investment funds can improve liquidity for investors through diversification

7 Steps To Start An Investment Fund With Friends

Steps To Start An Investment Fund With Friends

Step – 1: Make A List Of Your Friends

This is the very first step of forming an investment fund where you have to find friends/members for the investment club. You will require at least 10 – 15 members for a profitable investment plan. Though you can start with at least 6 members but the more members you can have on your fund the better. You will be able to raise sufficient funds for the investment quite easily.

However, you must understand that the larger the group, the more responsibilities for you. A larger group also means management principles and more coordination. You have to maintain a good relationship with everyone and ensure everyone is on the same page. Moreover, each of the members must have a clear idea about investing and have the skill to identify investment opportunities. These are some common challenges of having a large group of investors.

Therefore, finding the right member for the investment club is very important. You should try to pick members who are reliable well organized, good decision-makers, and ready to invest. Moreover, the members must have to mentality to contribute money, time and opinions when and as needed.

Step – 2: Create An Organizational Structure

Once the members are selected for the investment club, hold an initial meeting to discuss club formation, goals, missions, and visions. If you have fewer members then the structure of the investment fund will be informal. But, if you manage to form a large group then you have to create an appropriate organizational system. Moreover, you will need a predefined framework to ensure that nothing goes wrong regarding finances. So, when you are thinking about the organizational structure of your investment fund it must have the following basics:

1. If the club has more than 10 members then you will need a president, a vice-president, a secretary, an assistant treasurer, and a treasurer. You also have to create a term for each position.

2. Define the role and responsibility of each member of the investor group. For example, who will place the physical trade, who will do the taxes, etc.

3. Fix a time and place for every meeting so each member finds it convenient to join the meeting.

Step – 3: Establish Club Rules And Goals

There is no way you can maintain and improve your investment club if you don’t create club rules and goals. Therefore, you should define the club rules and targets after creating the organizational structure. You have to determine how much each member can contribute financially to the club. Moreover, you have to set up basic buying and selling rules or basic investing rules. There should be a minimum contribution limit and you have to keep accurate track of each member’s percentage share. If members invest differently then you have to set the proportion of the return for various amounts of investments.

Step – 4: Establish A Legal Entity

Regardless of the size of your investment fund, it is very important to set up a legal structure. If you manage to collect large investments and the investment returns increase over time then you must have to open a brokerage account as a business and run the organization ethically. There are various types of legal entities available but a limited liability partnership will be the best legal entity for the investment fund. Moreover, you have to create a partnership agreement and you can take professional help to form the partnership agreement. You also have to make sure that each member of the group reads the agreement and agrees to it before it is signed and sealed. Then you will need a bank account to secure your money and returns. You have to obtain the EIN (Employee Identification Number) before you can open a bank account with your investment club. You can easily get the EIN online from your state’s IRS website.

Step – 5: Open A Brokerage Account

So, you have a group of investors, and created a legal entity; now your next step is to open a bank account and a brokerage account to start investing. In order to invest in stocks, you have to choose a broker who would fulfill your requirements. There are two options available when it comes to choosing a broker: a full-service broker or an online broker; the choice is yours. Though, most of the investment clubs choose an online broker because a full-service broker costs more. If the broker you have chosen is experienced then he/she might be able to educate you on the fundamentals of investing.

Step – 6: Establish A General Agenda

One of the problems of starting an investment fund with friends is most of the members might not have proper knowledge about investment and every term related to investing funds. They might also lack financial knowledge. So, what you can do is, asks the members about their doubts and questions regarding investment or any other topics and then discusses these topics with all the members to increase knowledge and awareness. You can ask the members to read reputed financial news, magazines, and online blogs to educate and inspire themselves.

Step – 7: Start Investing

This is the final step of forming an investment fund with friends. Once the above steps are successfully done, start looking for investing options. Each club member must research potential assets that can be purchased. Then the investment option should be researched more and if there are two or more investment options then the members can vote on their favorite choices and make the final decision. Try to call a meeting every week or at least once a month to review the investment, club finances, profits or losses, and other important topics. While making a decision make sure it is made as a group to avoid any unnecessary conflict.

FAQs About How To Start An Investment Fund With Friends

1. Can Anyone Start An Investment Fund?

Yes, anyone can start an investment fund with their own money. Moreover, you can also accept money from accredited investors who have income greater than $200,000 for the past two years. So, legally anyone can start an investment fund.

2. Can You Start A Mutual Fund With Friends?

Yes, you can start a mutual fund with your friends if there are at least six people available to form the fund.

3. Can I Legally Invest Other People’s Money?

Yes, you can legally invest other people’s money only if you have a valid license as an investment professional. So, if you want to become a licensed investment professional then you have to be registered with the Securities and Exchange Commission or have a federal license.

4. Can An Investment Club Be An LLC?

Yes, an investment club or fund can create a legal partnership or a limited liability company (LLC), or a limited liability partnership (LLP).

5. What Is The Minimum Investment Amount For An Investment Fund?

There is no fixed minimum investment amount available by law for an investment fund or club. Usually, the members of the fund decide the minimum investment amount. The amount might be between $500 and $5,000 or more or less.

Last Updated on August 26, 2021 by Musa D

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