What is a Mutual Fund Wrap?

Mutual Funds have been all the hype in the recent past owing to their ability to provide lucrative investment returns. It is no wonder that mutual fund investments formed just 9.4 percent of an Indian household's savings in financial assets. With numerous types of mutual funds available, how do you know which one is right for you? This is where a mutual fund wrap consolidates and manages portfolios under a single wrap fee.

What is Mutual Fund Wrap?

Mutual fund wrap is a financial instrument that provides investors with customized portfolios. It helps in selecting funds from an extensive range of mutual funds without paying high sales loads. This tool is aimed at putting investors’ funds in well-performing sectors.

The major difference between a mutual fund wrap and other investment instruments is annual flat wrap fees. As the name suggests, these fees are charged flatly fixed and wrapped in a single fee. It covers research, administration, management, and other expenses. The operating expenses of the selected mutual fund become an additional cost.

How does it work?

In a mutual fund wrap, the broker builds an investor’s profile according to their preferences and objectives. It is created based on factors like age, risk-taking ability, time, expected return, and others. The financial advisor will, then, suggest to the investor, a list of funds suitable to their investment profile.

The investor’s portfolio is further managed by the professional fund manager. Usually, a professional portfolio manager, responsible for managing the entire portfolio, is different from a broker. The investor is required to pay annual flat wrap fees based on the assets in the portfolio. Additionally, you need to pay operating fees for funds in the portfolio.

Mutual fund wrap competition

A common competitor of mutual fund wrap is a full-service brokerage account. In this account, the fees are charged per trade in contrast to flat wrap fees. When the investment activity is moderate, the full-service brokerage is a better option, whereas a mutual fund wrap is suitable for high net-worth investors.

The amount of minimum investment required in mutual funds is competitively higher. The existence of Robo advisors makes full-service brokerage equally competitive with mutual fund wrap. Investors can select the alternative considering the level of trading activity and fees.

Final Words

To sum up, a mutual fund wrap is a good investment option to consider. Personalized portfolios can help the investor in earning higher returns according to his/her investment preferences. Though, it is not preferred by all the investors due to the high level of minimum investment and higher charges.