What Is a Mirror Fund?

A mirror fund is an investment opportunity in which someone can pay into an account that is essentially a copy of an existing mutual fund. Rather than investing directly into a major fund, someone pays into another account that is then used by an established company to buy into the actual mutual fund. The major benefit of this type of investment is that there are no entry or exit charges that need to be paid. A mirror fund may not be as profitable as it initially seems, however, since the return on it is likely to be substantially lower than on the mutual fund it reflects.

The basic idea behind a mirror fund is for people to more easily invest in an established mutual fund through a "copy" or "reflection" of it. Rather than investing directly into a mutual fund, which is a financial pool made up of numerous investors, people can pay into a mirror fund established by a company that effectively acts as an arbitrator between the investors and the actual mutual fund organization. Investments made into the "copy" are used to pay into the actual fund by the middle company, rather than by individual investors.

One of the major advantages to using a mirror fund is that individual investors are able to avoid any entry or exit fees. Mutual funds may be willing to waive these fees for larger investment firms that represent numerous individuals. It can also be quite a bit easier for investors to change between different funds in this way. Since a mirror fund does not have the limitations or restrictions of an actual mutual fund, an investor can more easily move money around between accounts.

There has been some criticism of the way in which mirror funds are typically established. The company that creates this account receives the actual return from the mutual fund based on investments into it. This return is passed onto investors in the mirror fund, though the middle company takes a percentage as profit. Even though this amount may seem fairly small, it can have a tremendous impact on the amount made by investors over the long run.

One of the advantages of a mirror fund is the lack of entry or exit fees. The amount of return kept by the investing company can often surpass these expenses, however, which means that ultimately investors can lose money going through such a company. It can be more profitable for an investor to pay directly into a mutual fund, even though initial costs may be higher.