What are 'Pooled Funds'
Pooled funds are funds from many individual investors that are aggregated for the purposes of investment, as in the case of a mutual or pension fund. Investors in pooled fund investments benefit from economies of scale, which allow for lower trading costs per dollar of investment, diversification and professional money management. Along with the added costs involved in the form of management fees, the main detractor of pooled fund investments is that capital gains are spread evenly among all investors — sometimes at the expense of new shareholders.
BREAKING DOWN 'Pooled Funds'Groups such as investment clubs, partnerships and trusts use pooled funds to invest in stocks, bonds and mutual funds. The pooled account lets the investors be treated as a single account holder, allowing them to buy more shares.
Pros and Cons of Pooled Funds
Groups of investors can take advantage of opportunities typically available to only large investors. In addition, investors save on transaction costs and further diversify their portfolios. However, the individual investor has less control over the group’s investment decisions than he would making the decisions alone. In addition, each investor has different goals, risk levels and exit strategies. Therefore, not all group decisions are best for each individual in the group. Also, the group must reach a consensus before deciding what to purchase. When the market is volatile, taking the time and effort to reach an agreement can take away opportunities for quick profits or reducing potential losses.
Advantages of Mutual Funds
Mutual funds spread their holdings across various investment vehicles, reducing the effect any single security or class of securities has on the overall portfolio. Because mutual funds contain hundreds or thousands of securities, investors are less affected if one security underperforms.
Professionals manage non-index mutual funds, ensuring investors receive the best risk-return tradeoff aligning with their objectives. This helps investors who lack the time and knowledge for managing their own portfolios. Mutual funds allow reinvestment of dividends and interest for additional fund shares. The investor saves money by not paying transaction fees while growing his portfolio. Mutual funds also offer a range of investment options for the highly aggressive, mildly aggressive and risk-adverse investor. Most investors can purchase mutual funds to help meet their objectives.
Disadvantages of Mutual Funds
When investing in a mutual fund, an investor gives control to the money manager running it.
An investor is taxed when the fund sells individual stocks and distributes capital gains. If the fund sells holdings often, capital gains distributions could happen annually, increasing an investor’s taxable income. Exceptions include investing via a traditional individual retirement account (IRA), Roth IRA or employer-sponsored plan such as a 401(k).
Some mutual funds assess a load, or sales charge, on all purchases. All mutual funds charge annual expenses as the cost of doing business. Because the expense ratio is expressed as a percentage, the investor pays annually a portion of his account value, which lowers his gains.