What are Pooled Funds?

The rudimentary pooled fund definition is that they are accumulated capital from multiple investors combined into one giant portfolio. Several examples of professionally managed pooled funds include mutual funds, hedge funds, exchange-traded funds, pension funds, and unit investment trusts. Investing in pooled funds allows investors to take advantage of economies of scale, which result in lower trading costs and greater diversification.

A group of people such as investment clubs, partnerships, and trusts, pool their resources to invest in stocks, bonds, and mutual funds. When investors pool their capital, they can be treated as a single account holder, enabling them to acquire a greater number of shares than they would be able to purchase individually, and often at better (discounted) prices.

The most popular pooled funds are mutual funds. Actively managed by professionals, these funds spread their holdings across a variety of investment vehicles, reducing the impact that anyone or a class of securities have on the portfolio. Since mutual funds contain hundreds or thousands of securities, investors are less affected by the underperformance of one security.

There is also a pooled fund called a unit investment trust. Smaller investors invest their money in stocks, bonds, and other assets through these pooled funds. For instance, a group of small investors collectively invest in a share of Page Industries or MRF which has a high market value. However, a unit investment trust does not change its portfolio over time and invests for a fixed period.

How do Pooled funds Work?

Pooled funds are aggregated into a pot used for activities such as grantmaking, contracts, employee salaries, and other operations and programmatic expenditures. The intermediary would manage a pooled fund hosted by an intermediary in terms of finances, compliance, lobbying restrictions, grant-making due diligence, and human resources.

Pooled funds are governed by a governing board, which is often composed of donors, although it may also include non-donors such as issue experts. As a result, the governing body must make recommendations about using the funds to the board of the intermediary.

Advantages

• Diversification reduces risk.
• Economies of scale increase buying power.
• Money management is available from professionals.
• Investing is not expensive.

Disadvantages

• Fees and commissions are involved.
• Fund activities may have tax implications.
• Investments are uncontrollable by the individual.
• The upside of diversification can be limited.

The Bottom Line

Investing passively in pooled investment funds can be a great option for investors who have limited funds available. The availability of a variety of pooled investment vehicles makes investing in real estate more accessible than ever before. All investments carry some risk, and it's up to you to determine which one is right for you.