Funds can help you diversify your risk and save you time.

When you decide to invest, it’s important to conduct an appropriate amount of due diligence. That due diligence takes time. But how much time do you have, and how much do you know about the business you want to invest in?

A direct investment in a company is different than investing in either a public or a private fund with a group of other investors.

When you invest directly in a company—whether you start a new company, buy an existing one or simply provide a startup loan as a silent investor—you’re making a large commitment. On the other hand, while investing in a fund is still a commitment, it’s not nearly a commitment of the same scale.

Diversification

Just about any investment adviser, financial planner or retirement expert will recommend diversification. It’s probably the most widely cited way in which to protect your investments.

Diversification means spreading out your investment dollars across multiple investments as opposed to putting all your eggs in one basket. The theory is that if something negative should happen to one investment, you’re only losing a portion of the total money you invested. If you put every dollar into a single investment that goes south, you risk losing everything.

When you invest in or run a single company, you’re not diversifying. But when you invest in funds, you can spread your dollars out across multiple funds. Many funds themselves will even internally diversify, meaning that they’ll invest in multiple ways. A single mutual fund of stocks, for instance, may invest in telecommunications, utility, biotech and real estate companies. That’s four industries for the entry price of a single investment.

Affordability

If you start your own business or purchase an existing business, you’re talking about a major financial commitment—one that could easily cost you thousands of dollars. Plus, there are often financial overruns, meaning that the actual costs are greater than what you anticipate. In these instances, you’re solely responsible for the overages, and if you can’t afford them, the business simply stops operating.

When you invest in a fund, however, the burden is on the fund manager. You invest a set amount and if the company needs more money, you are under no obligation to provide additional funds. Additionally, instead of having to front the entire cost yourself, you need to invest only a small portion of the total funds required. The remainder of the capital will come from other investors. This allows you to save money and spread your dollars out across multiple funds, increasing your level of diversification.

Time

When you operate your own business, you alone are the responsible party. While the idea of being your own boss may sound exciting at first, it’s a huge responsibility. You’ll need to interview contractors; hire, train and manage employees; prepare financial reports; develop and implement marketing campaigns; purchase inventory; assess market conditions; understand contracts; and be a salesperson, bookkeeper, receptionist, and more until you can afford to bring on other people and start outsourcing tasks. Plus, you’ll have to actually do whatever it is that your business does.

Fund managers, on the other hand, are like your employees. They work for you, taking the time burden off your hands. All the daily tasks become their responsibility instead of your own, freeing you up to do other things—whether that’s working a full-time job, starting a business in another industry or spending more time with loved ones.

Time is one thing we cannot create more of. Using it efficiently is critical to success in both our professional and our personal lives.

Professional Management

Not everyone can be an expert at all things. Especially if your goal is to maintain a diverse portfolio of funds, it can be especially challenging to find the time to develop the skills to be an expert in multiple industries.

When you invest in a fund, you’re investing in its management. This is key. You’re investing in the resources of the manager, their skills, their problem-solving skills and their industry expertise. You don’t have to be an expert, because someone you trust is. Of course, if you don’t trust a particular fund manager to manage your money, then you probably shouldn’t invest with them in the first place.

Don’t be afraid to speak directly with fund managers, to meet them in person, so they can get to know your goals and objectives and see if and how they match those goals and objectives to your funds. Just as not every investment is right for you, not every investor is right for a given investment fund.

Public, Private, Regulation D, Regulation A

If you decide to invest in a fund, you will not be lacking for options. When most people think of investment funds, they think of a mutual fund or an exchange-traded fund. Like all funds, these are simple financial offerings where a group of investors pool their money together toward a common goal. Mutual funds can invest in businesses, stocks, bonds, municipalities or a combination thereof, while ETFs are designed to emulate a stock market exchange or index such as the Dow Jones, Standard & Poor’s 500 index, Russell 2000 or NASDAQ.

Public funds are those that are available on public stock markets such as the New York Stock Exchange or the NASDAQ. Here, everyday people and full-time traders alike can readily invest in individual stocks, bonds, commodities or more collectively, in funds.

Private Funds—Regulation D

Private investment funds are those not readily available for trading on a public stock exchange. They must be purchased privately through the issuing entity. You can’t simply use an online brokerage account.

These funds get their name from the Securities Act of 1933 legislation that describes them. Without getting too technical, there are different types of Regulation D, or “Reg D” funds. The most common are Rules 506(b) and 506(c) of Regulation D.

Depending on the type of offering a company issues, they may or may not be able to publicly advertise their funds or accept money from non-accredited investors. A simplified definition of an accredited investor is someone (1) with a net worth of more than $1 million, not including their primary residence or (2) who has an annual income for the past two years of $200,000 if single and $300,000 if married. Additional conditions may apply.

Some companies may choose to engage in “general solicitation” or marketing of their fund. Others may choose to accept a limited number of non-accredited investors into their fund, but not be allowed to engage in any advertising.

Private Funds—Regulation A+

A much less commonly used type of private investment fund is a Regulation A+ fund. Traditionally, it would cost $100,000-$300,000 and as much as two years to get these funds set up. That leads most fund managers to avoid them in favor of the much simpler Reg D options.

Like their Reg D counterparts, Reg A+ funds are private, and investments must be made directly with the issuing company. But unlike with Regulation D, Reg A+ funds can advertise both openly and publicly as well as accept an unlimited number of non-accredited investors. However, the filing requirements are more stringent and more similar to those of a publicly traded company.

Also, there are two different types or “tiers” of Reg A+ offerings. Tier 1 offerings can raise up to $20 million in a 12-month period (with an average historical raise of $5 million). Tier 2 offerings can raise up to $50 million (with an average historical raise of $16 million).

The trade-off here is that Tier 2 offerings impose limits on the amount that non-accredited investors can contribute to the fund. Specifically, a non-accredited investor can invest up to 10 percent of their net worth or annual income, whichever is greater. Accredited investors and non-accredited investors who participate in Tier 1 offerings have no such limitations.

With the ability to raise money from non-accredited investors, advertise openly and the costs and time required to start up a Reg A+ fund decreasing, we anticipate that there will be many more of these popping up in the years to come. To date however, there have been just over 100 Reg A+ filings, with approximately half of them being abandoned before launch and closer to 20 percent actively operating today. Some have achieved their goals, while others have stopped raising money for other reasons, such as hitting their expiration date (12 months from the launch date). ∞