Pooled Fund

Publication Date :

20 Jul, 2023

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Table Of Contents

Pooled Fund Meaning

A pooled fund is a financial investment fund in which multiple investors contribute money into a single joint investment vehicle to invest in a diverse range of securities. These funds are commonly utilized to achieve economies of scale, reducing transaction costs and expanding investment opportunities while maintaining effective management.

These funds are overseen by professional investment managers who allocate the contributed funds into diversified portfolios of securities or assets. This encompasses various types of assets, such as sovereign wealth funds, mutual funds, private equity funds, ETFs (exchange-traded funds), and hedge funds. One notable characteristic of pooled funds is that they attract contributions from numerous investors and retirement boards.

Pooled Fund Meaning

A pooled fund is an investment fund where multiple investors pool their money into a single vehicle to invest in a range of securities.
Pooled funds are primarily used to achieve cost savings through economies of scale, reducing transaction costs and facilitating investment management.
Examples of pooled investment vehicles include mutual funds, exchange-traded funds (ETFs), hedge funds, private equity funds, and real estate funds.
Pooled funds involve multiple investors pooling their money for a common investment objective. In contrast, mutual funds accumulate funds from numerous investors to create a diversified portfolio. Finally, composite funds combine various asset classes into a single investment product.

Pooled Fund Explained

A pooled fund is an investment vehicle that combines money from multiple investors into a single account, allowing the investment to be treated as if a single account holder or investor made it. This pooling of funds offers investors new investment opportunities and the ability to collectively purchase a larger number of shares, which would be challenging for individual investors with limited funds.

Pooled funds come in various forms, including real estate investment trusts (REITs), hedge funds, mutual funds, exchange-traded funds (ETFs), private equity funds, country-based pooled funds, pooled funds Philippines, and hedge funds. Each of these funds has its own strategies, restrictions, and investment objectives, providing investors with a high level of portfolio diversification regardless of the amount invested.

Furthermore, pooled funds allow investors to gain exposure to a wide range of geographies, asset classes, and sectors that may not be accessible to individual investors. This helps mitigate risks by avoiding losses that may arise from the underperformance of a particular sector, geography, or asset class. Additionally, the large number of investors participating in these funds brings economies of scale into play, enabling fund managers to reduce transaction and administrative costs. Consequently, the overall investment cost decreases, leading to improved returns.

Pooled funds are regulated by the Securities and Exchange Commission (SEC) in the United States, ensuring the safety of investors' funds, efficient fund performance, and the prevention of fraudulent trading. The SEC establishes regulations related to diversification, disclosure requirements, and liquidity.

However, pooled funds carry certain risks, including liquidity risk, management risk, market volatility, lack of control for investors over the funds, and management fees charged as a percentage of assets under management. Despite these risks, pooled funds offer several advantages to investors, such as portfolio diversification, regular income, low-risk investments, and potential capital appreciation.

Types

Pooled investment vehicles encompass various types, each serving different investment purposes. The following are some notable examples:

Mutual funds: Mutual funds pool funds from numerous investors to create a diversified portfolio of assets, including bonds, securities, stocks, and other investments.
Exchange-traded funds (ETFs): ETFs are traded on security exchanges and hold a collection of securities. They offer the flexibility of trading individual stocks while providing diversification across multiple assets.
Hedge funds: Hedge funds are private investment funds that employ a wide range of strategies to generate potentially high returns for investors. However, they are characterized by high risk and typically target investors seeking higher yields than mutual funds.
Private equity funds: Private equity funds invest in privately held companies aiming to acquire or obtain controlling stakes in these firms. These funds play an active role in managing and growing the companies they invest in.
Real estate funds: Real estate funds invest in commercial or residential properties intending to generate capital appreciation and rental income. These funds provide investors with exposure to the real estate market without the need for direct property ownership.
Infrastructure funds: Infrastructure funds invest in infrastructure assets such as renewable energy projects, toll roads, or airports. They seek steady cash flows and capital appreciation from long-term infrastructure investments.
Sovereign wealth funds: Governments establish sovereign wealth funds to invest surplus reserves into a diverse range of assets, including bonds, real estate, and stocks. The primary goal of these funds is to generate long-term returns for future generations.

Examples

Let's use a few examples to understand the concept better:

Example # 1

BlackRock's UK Strategic Alternative Income Fund falls under the category of pooled funds. The fund aims to provide investors with alternative income sources by investing in a diversified portfolio of assets, including infrastructure, real estate, and renewable energy projects. By pooling the funds of multiple investors, the fund can access a wider range of investment opportunities and potentially achieve higher returns. BlackRock manages the fund, utilizing its expertise in portfolio management and asset allocation to optimize income generation for investors.

Example # 2

Imagine a group of friends who love investing in the stock market. They decided to form a pooled fund called "Smart Investors Club." Each friend contributes a certain amount of money to the fund, and they appoint one of their members as the fund manager. The fund manager then uses the pooled funds to invest in a diversified portfolio of stocks, aiming to maximize returns for all members. By pooling their resources, the friends can access a larger capital base and potentially achieve better investment outcomes.

Pooled Fund vs Mutual Fund vs Composite Fund

Although pooled, mutual, and composite funds are all types of investment funds, they have lots of dissimilarities, as portrayed in the below table:

Pooled Fund	Mutual Fund	Composite Fund
Investors pool money together for a common investment objective	Invests in a diversified portfolio of assets	Combines various asset classes into a single investment product
Used by both individual and institutional investors	Primarily used by individual investors	Used by both individual and institutional investors
Subject to securities regulations overseen by the SEC	Subject to securities regulations overseen by the SEC	Subject to regulations based on asset type
May have specific investment strategies for asset classes	Specific investment strategies for asset classes	No specific investment strategy for asset classes
Charges may be flat fees or a combination of fees	Fees based on a percentage of assets under management	Charges may be flat fees or a combination of fees

Frequently Asked Questions (FAQs)

1. What is the major advantage of pooled funds?

The major advantage of pooled funds is the ability to achieve diversification. By pooling money from multiple investors, pooled funds can invest in a broad range of assets and spread risk across different securities, sectors, and geographies. This diversification helps to mitigate the impact of individual investment performance and enhances the potential for stable returns.

2. What are the disadvantages of pooled funds?

Some disadvantages of it include limited control over individual investment decisions, the presence of management fees, and the possibility of not aligning perfectly with an individual investor's specific investment goals or risk tolerance. Additionally, pooled funds may have minimum investment requirements or redemption restrictions that can limit flexibility for investors.

3. What is SMA vs pooled funds?

SMA (Separately Managed Account) and pooled funds are different investment structures. Pooled funds involve pooling money from multiple investors into a single investment vehicle managed by professionals. Thus providing diversification and economies of scale. In contrast, SMA is a personalized investment account. Furthermore, under this type, a professional money manager manages an individual investor's assets separately, offering customization. SMA generally requires a higher investment amount compared to pooled funds.