A:

Mutual funds can invest in private companies, which may come as a surprise to many investors. It is rare for a fund to have more than 1% of its assets tied up in private companies; however, recent trends in 2015 show mutual funds are showing great interest in private startups.

Recent Startup Success

In an attempt to set themselves apart from high-performing index funds, many of the largest mutual funds have poured billions into fast-growing private companies. While some have found lightning in a bottle with the success of startups such as Pinterest and Uber, there have also been plenty of utter flops. As the private market has seen more activity, some companies have gone so far as to stay private longer than usual to keep the appeal of being the next big pre-IPO investment.

High Risk, High Reward?

By getting a leg up on the index funds, many mutual funds are betting on the early growth often enjoyed by young startups. The flipside is many of those young companies struggle in the early going, and as a result, leave investors with little or nothing to show for it. Analysts believe that while risky, the lure of grabbing up shares of the next superstar startup continues to be too tempting to pass up.

Next Big Flop

There is a lot to be said for being a part of a big story. Fund managers have the task of staying one step ahead in a world where every investor has up-to-the-minute news at his fingertips. While it is tempting to find “the next big thing,” make sure you can live with it being the next big flop before jumping in feet first.

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