Pooled funds: An in-depth exploration

Just think about it – you and your friends are pooling money together. But instead of spending that cash on small, immediate purchases, this pool invests the amount into a diversified portfolio – stocks, bonds and other assets that can grow in value over time. 

The outcome? A financial tool known as the pooled fund where your combined resources may increase exponentially.

Ready to learn more about this powerful financial tool? Look no further! This article delves into pooled funds, explaining their workings, various types, advantages, and potential drawbacks.

What is a pooled fund?

The­ term “pooled funds” means mone­y from different investors is put toge­ther, or “pooled,” for investing.

To give a broader idea, pooled funds refer to collecting money from various sources, such as individuals and corporations, to invest it into different types of assets. Stocks, commodities, bonds or real estate can be among the investments where this money is put based on the fund’s investment goals.

Like mutual funds, pooled funds are managed as one portfolio. Each investor acquires units or shares that signify their ownership stake in the fund. The worthiness of these units or shares fluctuates with how well the underlying investments perform.

How does a pooled fund work?

The process of investing in a pooled fund is as follows:

• Investors contribute money to a common fund by purchasing shares or units, and the minimum amount varies with funds. 
• After that, the pool is taken over by professional/fund managers who invest this money in line with the objectives of each particular scheme.
• The net asset value (NAV) per unit or share reflects the fund’s performance. As the value of the underlying investments increases, so does the NAV. 
• Investors can earn returns through capital gains when they sell their units or dividends. 
• Pooled funds levy management charges to meet costs associated with professional management and operational expenses. These expenses eat into returns generated from such investments thereby affecting what investors end up with.

Types of pooled fund

Mutual funds, pension funds, exchange-traded funds, hedge funds, and unit investment trusts are all examples of professionally managed pooled funds.

1. Mutual funds:

Mutual funds are widely recognised pooled funds that offer a diversified portfolio of stocks, bonds, or a mix of both. Different types of mutual funds include growth, income or sector/market cap-specific funds.

2. Exchange-traded funds (ETFs):

ETFs function like mutual funds. But they are traded on stock exchanges like individual stocks. Often, their expense ratios are lower than some mutual funds.

3. Hedge funds:

A hedge fund is a vehicle typically with high-risk and high-reward investment features. It uses complex methods to produce profits. Hedge funds frequently impose substantial minimum investment criteria, making them inaccessible to many investors. 

If you think there is a difference between a pooled investment fund vs hedge fund, pooled funds vs mutual funds, and pooled funds vs segregated funds, then you are wrong because they all are types of pooled funds. 

Advantages of pooled funds

Some of the advantages of pooled funds are: 

• Pooled funds are a great way to spread your investment risk; thus, they provide diversification benefits. They hold different assets, so if one investment goes south, it won’t sink your whole ship.
• Pooled funds are overseen by seasoned professionals. These fund managers use their knowledge and research to make investment choices for you, saving you time and hassle. 
• Pooled funds are budget-friendly. You get a diversified portfolio for a lower price than you could build on your own.
• Starting with pooled funds is often easier than directly purchasing stocks and bonds. Minimum investment requirements are usually lower, and you do not need to handle the intricacies of the market on your own. 

Disadvantages of pooled funds

Even though pooled funds have many benefits, there are also some disadvantages:

• Investors give up on their control of selecting where to invest. The fund manager determines the portfolio’s composition and trading activity.
• All pooled investment schemes charge fees, including management fees and operational expenses. These charges reduce the amount received by investors as returns. 
• Even with professional management, it is uncertain that a pooled fund will beat the market. How well the fund performs depends on the skills possessed by a manager and the investment strategy chosen. 
• Some types, such as closed-end funds, may lack liquidity. In volatile markets, investors might fail to sell shares quickly at desired prices or fail altogether to sell them at all.

Bottomline

Pooled investments serve as a useful investment vehicle for those who want to diversify their portfolios, have them managed by experts, and easily access the market. However,  there are some limitations, including charges, absence of control and possibility of underperformance, which should not be ignored. 

Hence, investors must think about what they hope to achieve with their investments, how much risk they are willing to take and the costs attached to various pooled investments before settling on any one investment option.

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