Limited Partnerships vs. Mutual Fund Trusts: Key Factors Every Investor Should Consider

Choosing to invest via a Limited Partnership (LP) versus a Mutual Fund Trust depends on several key factors that impact an investor’s taxation, liability, liquidity, and overall investment goals. 

Understanding the differences between these two structures can help investors make informed decisions that best align with their financial objectives.

A Limited Partnership (LP) is an investment structure where investors pool their money. General Partners (GPs) manage the investment decisions, while Limited Partners (LPs) contribute capital without direct involvement in daily operations. 

Conversely, a Mutual Fund Trust pools money from many investors to collectively invest in a diversified portfolio of assets managed by professional fund managers.

In this article, we'll explore key differences between LPs and Mutual Fund Trusts—covering taxation, control, liability, liquidity, regulatory environment, investment strategies, and costs—to help you choose the right investment structure.

Taxation Treatment

Limited Partnership (LP): LPs offer a flow-through taxation structure, meaning that any income or losses earned by the partnership are passed directly to the investors (partners). Investors report this on their personal or corporate tax returns. This can be advantageous for high-net-worth investors who want control over how and when income is taxed, potentially using losses from the LP to offset other income.

Mutual Fund Trust: Income earned by a mutual fund trust is generally taxed at the trust level before distributions. Investors are taxed on dividends or capital gains, but they cannot directly claim losses from the fund on their tax returns. While this structure is simpler for most investors, it may be less tax-efficient for those seeking control over taxable events.

Control and Customization

LP: LPs typically offer greater flexibility and control over the types of investments made. Investors in an LP might have more say in management decisions or specific strategies, particularly if they are General Partners (GPs) or closely aligned with the management team. This structure can be appealing for those investing in private equity, real estate, or other alternative assets.

Mutual Fund Trust: These funds are managed by professional fund managers, and investors have no direct influence over the fund’s strategy or management. While this limits investor control, it also removes the burden of decision-making, making mutual fund trusts a hassle-free investment option.

Investor Liability

LP: In an LP, General Partners (GPs) have unlimited liability for the debts and obligations of the partnership. Limited Partners (LPs) have liability limited to their investment in the partnership. However, LP investors need to be cautious of their involvement in management to avoid triggering liability beyond their investment.

Mutual Fund Trust: Investors in mutual funds typically have no liability beyond their initial investment, making it an attractive option for risk-averse individuals who want to protect their personal assets.

Liquidity

LP: Limited Partnerships are often illiquid, with specific lock-up periods before investors can withdraw their capital. LPs are commonly used in private investments such as real estate or venture capital, where liquidity is often limited by the nature of the underlying assets.

Mutual Fund Trust: Mutual funds generally offer greater liquidity, allowing investors to redeem their units more frequently—often daily or weekly. This makes mutual fund trusts a better option for those who value flexibility and access to capital.

Recommended: Learn how the Parvis Secondary Market improves liquidity options for investors.

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Regulatory Environment

LP: LPs tend to be less regulated than mutual funds, providing greater flexibility in terms of investment strategies, such as leveraged or speculative investments. This may appeal to sophisticated investors seeking higher-risk, higher-reward opportunities.

Mutual Fund Trust: These funds are highly regulated to protect investors. Regulatory oversight from entities like the Canada Revenue Agency (CRA) or the Securities and Exchange Commission (SEC) in the U.S. ensures compliance, which can add investor confidence but may also limit potential returns due to stricter regulations.

Investment Strategy

LP: LPs are often structured for alternative investments, such as private equity, real estate, and infrastructure, which may offer higher potential returns but come with higher risk and longer investment horizons.

Mutual Fund Trust: These funds are typically diversified, investing in stocks, bonds, or ETFs. Their strategies are generally less risky and more accessible to retail investors, making them a suitable option for long-term growth with moderate risk.

Fees and Costs

LP: Fees associated with LPs are often performance-based and may include management fees and carried interest, particularly in private equity or hedge fund LPs.

Mutual Fund Trust: Investors in mutual funds are subject to management fees (MERs) but typically do not face performance fees. However, the cost structure of mutual funds is usually more transparent and predictable than that of LPs.

Conclusion: Which One Should You Choose?

Why choose an LP?
Investors seeking tax advantages, greater control over investment choices, or access to alternative investments like real estate or private equity may prefer a Limited Partnership.

Why choose a Mutual Fund Trust?
Investors looking for simplicity, liquidity, limited liability, and professional management might find mutual fund trusts more appealing.

Ultimately, the decision between an LP and a mutual fund trust depends on your risk tolerance, tax situation, desired level of control, and investment strategy. 

At Parvis, several investment opportunities are available as both Limited Partnerships and Mutual Fund Trusts, allowing investors to choose the structure that best fits their goals: 

• Wildwood Investment Fund Limited Partnership and Mutual Fund Trust
• Goodland Equity Partners has both a LP and MFT offer available to Parvis users within our platform.

If you're unsure which structure best aligns with your financial goals, consulting with a financial advisor, tax specialist, or a Parvis dealing representative can help you make an informed choice.