Difference Between Public & Private Mutual Funds

Public mutual funds, as their name suggests, are open to the public to invest in. They are managed by professional fund managers, who actively invest in various securities to achieve the mutual funds’ stated objectives, which could be capital growth or income. In the United States, investment companies which manage public mutual funds are registered with and regulated by the U.S. Securities and Exchange Commission. A public mutual fund can be an index fund, a stock fund, a bond fund or a money market fund.

Investors purchase shares of a public mutual fund from either the investment company itself or one of its brokers. Mutual fund shares cannot be purchased or sold on secondary markets, such as the New York Stock Exchange. When investors purchase mutual fund shares, they pay the net asset value per share. Many, but not all, mutual funds also charge a sales load, a fee for the privilege of investing in the mutual fund. Public mutual funds are redeemable, meaning that when investors want to sell their shares, they must sell them back to the investment company or its broker for the net asset value per share minus any load or additional fees that might exist.

Investors do not need specialized knowledge to invest in public mutual funds. Public mutual funds spread the risk of investment because they combine funds from many different investors and generally diversify with a wide variety of investments. They vary in their investment mix and objectives, and can accommodate everyone from the conservative investor seeking steady income to the risk-taking investor seeking growth.

Private mutual funds are an exclusive investment with a limited number of investors. The minimal investment for a share of a private mutual fund is much higher than that of a public mutual fund. Depending upon the number of investors in a private mutual fund, there is little or no government regulation. Private mutual funds, including hedge funds, tend to be more leveraged than public mutual funds. It is common for private mutual funds to use financial derivatives, repurchase agreements and additional borrowing methods. Private mutual funds tend to be based out of the United States and subject to the host nation's rules governing private mutual funds.

If you're wealthy enough to invest in a private fund, one of the prime benefits is the comparative lack of regulation. Less regulation brings about greater investment risks, but also the potential for greater investment rewards. Private mutual funds in certain nations can be tax effective collective investment entities. Each nation offers specific benefits for private mutual funds. In St. Lucia, for example, a private mutual fund can be set up very quickly – within 15 days of submitting the required documents. Neither an administrator nor annual audits are required, which is a benefit for investors who are weary of regulation.