This Article Contains:
- 5 types of pooled investment vehicles
- 3 benefits of pooled investment vehicles
- 3 disadvantages of pooled investment vehicles
5 Types Of Pooled Investment Vehicles
Most pooled vehicles operate on a similar principle - collect money from multiple investors and invest on their behalf. However, different pooled vehicles can still operate very differently.
Here’s a list of five popular pooled investment vehicles in 2021 and how they operate:
1. Mutual funds
Mutual funds are open-ended funds, which means that the companies that issue them can create new shares on demand. When an investor purchases a share in a mutual fund, it represents partial ownership of that fund.
The fund decides the Net Asset Value (NAV) of each share (the price of each share) by dividing the total value of the fund by the number of its shares and at what rate the shares should be bought and sold.
An actively managed fund tends to have a higher NAV than passively managed funds.
Invest via: Betterment
Betterment is a goal-based investment platform for investing in mutual funds.
Betterment analyzes data about your financial goals and syncs them with your external (savings, retirement, etc.) accounts. Based on this, they create an investment portfolio for you.
They suggest different strategies depending on whether you’re investing for the:
- Short-term: vacations, medical procedures
- Medium-term: higher education, renovations, etc.
- Long-term: house, retirement, etc.
There’s no minimum investment.
Betterment charges 0.25% per year on the invested balance, which covers all trading costs. There are no additional transaction fees.
The mutual funds may charge a 0.03% to 0.5% fee on each investment.
Different strategies yield different returns.
However, Betterment aims to create strategies that could yield 38% more after-tax returns.
2. Hedge funds
Hedge funds are similar to mutual funds - however, they’re not as regulated by the Securities and Exchange Commission (SEC.)
This pooled investment vehicle also invests in riskier assets and opportunities to yield higher than benchmark returns.
As a result, they’re traditionally reserved for high net worth individuals and accredited investors - much like private equity and venture capital funds.
Invest via: Titan
Titan is a Robo-advisor that helps anyone invest like a hedge fund. However, it operates under the same regulations as any other pooled fund for non-accredited investors.
Titan does this by leveraging the expertise of top Wall Street professionals and investment advisors to create highly-profitable portfolios.
Every portfolio with Titan, regardless of the investment strategy, holds the same 20 stocks.
Like a hedge fund, a Titan hedge fund manager shorts 0%-20% of the market to hedge against the market (based on the investors’ risk tolerances.)
Each quarter, Titan reviews the 13F filings and rebalances the portfolio to maximize returns.
You can start investing with Titan with just $100.
If you’re using pension funds or an automated deposit account, the minimum investment is $500.
You’ll be charged a $5 monthly fee for deposits below $10,000.
For anything above $10,000, you’ll pay Titan a 1% monthly advisory fee.
Titan targets a 15% annualized return on average.
3. Exchange Traded Funds (ETF)
A mutual fund and an ETF work on the same principle of investing in stocks, bonds, and other assets to earn higher returns.
However, while mutual funds try to outperform most indexes, an exchange traded fund closely tracks them.
For the same reason, ETFs tend to be passively managed and have a lower investment management fee.
Invest via: Public
Public is a ‘social’ investment company that lets you invest in stocks and ETFs without any minimum capital requirements or commissions.
Just create a Public investment account, input your personal details, and you can start investing in over 5000 stocks and ETFs on the Public app.
You can start investing from just $1 on Public.
As a zero-commission app, Public doesn’t charge any transaction fees. But you’ll need to pay for any additional services such as broker-manned phone trades ($30), domestic wire transfer ($30), paper statements ($35), etc.
Returns on Public vary depending on your portfolio.
4. Real Estate Investment Trusts (REIT)
A REIT works similarly to a mutual fund - where it pools money from investors to own and manage (usually commercial) real estate. This pooled investment vehicle helps retail investors benefit from real estate investing without the high minimum investments and extensive due diligence requirements.
Invest via: DiversyFund
DiversyFund buys, renovates, rents out, and manages all their properties, making them vertically-integrated. This means your investment doesn’t include any fees for any intermediaries.
Unlike an expensive private investment vehicle or a private fund that allows only accredited investors to invest, DiversyFund invites non-accredited investors too. REIT shares can start from as low as $10.
Different investor profiles have their own minimum investment criteria on DiversyFund:
- Starter: starting at $500
- High-growth: starting at $15,000
- Auto-investor: starting at $500 followed by auto deposits into your investor account
DiversyFund doesn't charge any fees on the fund level.
In 2018, DisversyFund’s annualized returns were 17.3%.
5. Closed ended funds
Unlike an open-ended mutual fund, a closed end fund cannot reissue or buy shares on demand. It has a fixed number of shares allotted during a specific duration.
Publicly-listed closed-ended funds can issue Initial Public Offerings (IPOs).
Buyers can then sell these shares to others on an exchange.
Closed-ended funds also charge a management fee like mutual funds.
However, since it has a smaller pool of investors, these fees are comparatively higher.
Some popular close-ended funds are:
- Eaton Vance Tax-Managed Global Diversified Equity Income (EXG): Invests in world stocks
- Alliance Bernstein Income Fund (ACG): Invests in multisector bonds
- DNP Select Income (DNP): Invests in utilities
3 Benefits Of Pooled Investment Vehicles
Wondering if pooled funds tick off your investment criteria?
Check out this list of some of the biggest advantages of investing in a pooled fund over a direct investment.
Most pooled funds invest in a diversified portfolio of stocks, bonds, derivatives, and alternative assets.
For example, a mutual fund will construct a portfolio spanning a variety of small and large companies. This improves your chances of earning higher returns and shields you from isolated market fluctuations.
2. Economies of scale: more buying power
A large group of investors has an obvious advantage over an individual investor. Pooled funds can use this additional buying power to negotiate lower brokerage and account management rates.
This means pooled funds act like force multipliers for private investments, helping retail investors operate on the same level as institutional investors.
3. Professional management
A pooled investment vehicle is under the control of a dedicated fund manager. With years of experience in reputed financial institutions, these fund managers and advisers act in the investors’ interest to maximize their returns.
3 Disadvantages Of Pooled Investment Vehicles
Every day, newer investors around the world are discovering the unique appeal of pooled funds. They’re uniquely suited to the needs of investors who want higher returns for a fraction of the risk.
However, a pooled fund investment is not without its drawbacks. Here are some of them:
1. Limited control
As your money is pooled together into a pooled vehicle, each individual investor has limited or completely no say in what the fund invests in.
In a professionally managed fund, this is usually entirely up to the fund manager. And in other types of funds, most investment decisions are made by consensus.
During times of market volatility, taking the time to reach a collective agreement can limit the fund’s ability to make quick profits and or limit losses.
This is another drawback with most pooled funds - especially with those that are actively managed. Every investor has to pay a management fee - usually charged as a percentage of the fund’s assets-under-management (AUM) - which cuts into your capital gains.
Most fees are not performance-based, which means that they are payable even if the fund loses money.
3. Lock-in periods
Many pooled funds have lock-in periods - where you’re not allowed to cash out. This can be a major drawback when the fund isn’t doing very well, and you want to cut your losses and leave. As the lock-in period hasn’t passed, you’re forced to remain tied to the fund.
Additionally, this limits your investment’s liquidity - especially when you compare it to directly investing in stocks - which aren’t illiquid and allow you to cash out whenever you want.
Pooled Funds: Together, You’re Stronger!
A pooled investment vehicle is ideal for investors who want to grow their portfolios without the hassle of personally monitoring multiple assets.
These investment opportunities usually have low investment minimums and leverage professional expertise to ensure that your money is well invested.
And if you want to learn more about the various pooled investment options you can access, check out Moneymade. It has all the information that prospective investors need to make an informed decision - from fees, potential returns, and sign-up procedures - you’ll find it all!