Mar 10, 2021

What Are Pooled Investment Vehicles? (2021 Guide)

Want to learn about pooled investment vehicles and what they can do for you?

A pooled investment vehicle, also known as a pooled fund or a collective investment vehicle, is a professionally managed investment fund that pools money from many investors to invest in a particular portfolio or asset. 

It’s a type of indirect investment where a retail investor (like you) authorizes a fund house, fund manager, or investment adviser to invest the money into securities and assets on your behalf. 

A pooled investment vehicle is an excellent opportunity for retail investors to diversify their investments across many asset classes. 

Some common examples of a pooled investment fund include:

  • Mutual funds
  • Hedge funds
  • Exchange Traded Funds ( ETF)
  • Real Estate Investment Trust (REIT)
  • Closed ended funds

In this article, we’ll explore five popular pooled investment options and their advantages and disadvantages.

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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. 

Process

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.

Minimum Investment

There’s no minimum investment.

Fees

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. 

Potential returns

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. 

Process

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. 

Minimum Investment

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.

Fees

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. 

Potential returns 

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. 

Process

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.  

Minimum Investment

You can start investing from just $1 on Public. 

Fees

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. 

Potential returns

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. 

Process

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. 

Minimum Investment

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

Fees

DiversyFund doesn't charge any fees on the fund level. 

Potential returns

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. 

1. Diversification

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.

2. Fees

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!

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