What hoops would I have to jump through to create my own mutual fund?

QUESTION: I'm trying to find out what hoops I'd have to jump through to create my own mutual fund. I don't want to simply build my own diversified portfolio and I don't want to start an investment club. While I have some extensive experience in individual equity trading, I have no idea what paperwork I'd need to file to create my own fund.

ANSWER: With roughly 5,900 mutual funds in existence -- many of which are struggling in today's environment -- your conviction that yet another fund should be added to the mix shows real confidence. Be warned, though: The hurdles a would-be fund manager must face to get a fund off the ground are enough to make even a talented stock-picker break out in a sweat.

Mutual funds are highly regulated by the Securities and Exchange Commission under the Investment Company Act of 1940. Opening one requires $100,000 in seed money plus a fund-registration statement filed with the SEC that provides details on the fund's objective and operations.

While determining a fund's objective might not be terribly difficult, setting up the fund's operations can be tricky business. Mutual funds, which are overseen by a board of directors, are managed by a team of service providers. In addition to the investment advisers (the team that will manage the portfolio), there's also (among other things): a distributor (which will sell shares to the public); a transfer agent (which does the record keeping); an accounting firm (responsible for the calculation of the net asset value, or NAV, as well as handling tax issues); legal counsel; an auditor; and a fund administrator, explains Matt Sadler, president of Quintara Capital Management, a small firm that launched its first mutual fund in March 2002.

"It's a complex web of relationships, partnerships and vendors that you pull together. Each role not only has a practical purpose, but also very clear regulatory and compliance responsibilities," Sadler explains. "The different roles and the different regulations are in place as safeguards for the underlying shareholders. It doesn't safeguard the risk of the underlying investments, but it certainly safeguards it from shenanigans." While large mutual fund families already have this network in place, for those just getting started, lining up these relationships can be the hardest part of launching a fund, says Scott Keller, principal at Henssler Asset Management, a firm that launched its first fund more than four years ago.

And while $100,000 is all that's required to open a fund, that's only the beginning of the costs. Lawyers, accountants and other consultants don't come cheap. Also, national distribution requires registration for sale in each state, with annual fees ranging from $50 to $2,500 per state, says Keller, who notes that being listed on the fund supermarkets like those offered at Schwab and Fidelity also costs money. And remember, in order for a fund to be profitable, a substantial amount of money has to be in the kitty. A fund needs $50 million to $100 million in assets to be "viable economically," according to a brochure published by the Investment Company Institute called The Organization and Operation of a Mutual Fund.

Granted, the folks we spoke with for this story said that a fund could reach profitability with significantly less in assets. Nevertheless, to get anywhere near $50 million, a young fund needs to get the word out. That means a marketing plan is necessary -- particularly for no-load funds, which won't have a network of brokers talking up the fund. After all, with little or no track record, competing with thousands of other well-established funds is no easy task.

All of this might have you rethinking the simple elegance of building your own diversified portfolio or launching an investment club. An option perhaps worth considering: folios, which allow investors to own a basket of stocks that can be traded frequently without incurring any costs per trade. (You instead pay a flat fee for service.) Foliofn, E*Trade and Fidelity are some of the firms that offer these investment vehicles.