written by: Finn Orfano•edited by: Jason C. Chavis•updated: 6/23/2010
Pooled investment funds are offered by a variety of entities, including trust companies, investment management firms, investment clubs, insurance companies, commercial banks, etc. Investment in pooled funds can be a good option as long as you understand the advantages/disadvantages of pooled funds.
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A pooled fund is nothing more than an investment for which two or more parties "pool", or combine, their investments. As such, they can be very informal, such as you and a friend pooling together funds that you invest co-jointly. However, in general, investment in pooled funds are trusts. Investors pool together the funds they will invest and a third party manages those investments under the terms set forth in the trust indenture. The trust indenture explains how the fund will operate, how it will be managed, and any fees that may be assessed through the administration and/or management of the pooled fund.
Pooled funds may be "closed" or "open". An "open" pooled fund is the most common form - it allows investors to sell their shares at their own discretion. In a "closed" pooled fund, redemptions are not permitted except under special (and specific) circumstances.
Pooled funds are very similar to mutual funds in that they operate as unit trusts. This means that investors deposit their investment into an account; the amount of deposit determines the number of units to which the investor is entitled. The primary difference between pooled funds and mutual funds is in their legal form; pooled funds do not have to have a prospectus under securities law.
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Investors may choose a pooled fund if doing so provides a tangible benefit. Specifically, pooled funds enable investors to invest in stocks they normally may not be able to, such as in the case of a minimum purchase (economies of scale), and/or they allow investors to save on transaction costs (economies of scope). This latter benefit is accomplished through the fact that a pooled investment fund (the investors' pooled funds) is treated like an individual investment account and so subject to singular transaction fees, in spite of however many investors may have pooled their funds for the investment.
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Inasmuch as pooled investment have various benefits inherent in its definition, an investment in pooled funds carries with it several disadvantages. First, when you invest in a pooled investment fund, you are throwing your proverbial hat in with a group of other people. Invariably, different people will have different investment goals, different levels of acceptable risk, and different investment strategies - for example, you may want to sell but your investment pool does not, or vice versa. Second, you may not be able to take advantage of some opportunities (e.g. a major swell in stock price may come after a company announcement and typically lasts only one day). It takes time to reach all parties in the investment pool and consensus must be reached before any action is executed. In addition, even if you reach consensus amongst the members of the investment pool, you may have to wait until the account administrator is available. Third, pooled investment funds can be as informal as you and a friend or as formal as a mutual fund or an investment club - the more formal the investment pool is, the larger the fees you will likely have to pay (fees that in some cases are large enough to mitigate the benefits inherent in pooled investment).