What it means
Instead of each investor buying and selling shares or bonds individually, the money is gathered into a single portfolio. Every investor receives units (a measured slice of the fund), and the value of each unit rises and falls with the value of the fund's investments.
Gains, income and costs are shared in proportion to units held. The appeal is simple.
Pooling lets investors spread risk across dozens or hundreds of holdings, share the cost of research and trading, and reach investments with high minimums. A manager makes the decisions on behalf of all investors, and the fund's rules describe what the manager may buy.
Pooled funds come in many legal forms, including mutual funds, unit trusts, collective investment trusts and private funds for institutions. Some are open to the public and are tightly regulated, while others are only offered to qualified investors such as pension schemes.
The form affects who can invest, how often money can be added or removed, and what reports are published. The price of a unit is called the net asset value (NAV) per unit, and it is calculated by dividing the fund's net assets by the number of units in issue.
Investors usually buy and sell at that price, adjusted for any fees. Because everybody trades with the pool at the same NAV, one investor's actions can affect the others, especially when a large redemption forces the fund to sell holdings.
Costs deserve attention. Management fees, administration charges and trading costs are taken from the fund, so the return investors see is after those costs.
Two funds holding the same assets can deliver different results because of what they charge. Pooled funds also carry particular risks.
Investors cannot choose individual holdings, they depend on the manager's skill and honesty, and some funds limit redemptions during stressed markets. Reading the fund's offering document is the best way to understand these terms before investing.
In practice
Real-world examples.
Example
A small business owner invests $20,000 in a pooled fund that holds hundreds of company shares. She could not afford to buy that range of shares directly, and the fund's manager handles the trading. Her $20,000 buys a slice of the whole portfolio, so one weak company does little harm to her overall result.
Example
A charity with $5,000,000 of reserves puts the money into a pooled bond fund alongside other charities. The shared fund keeps costs low, and each charity receives the same report on performance. The trustees can compare it easily with the fund's stated benchmark.
Example
A company pension scheme invests part of its assets in a pooled property fund. The scheme gains exposure to commercial buildings without the burden of buying and managing them directly, and it can sell units later if it needs the cash to pay members.
Formula
Calculation
NAV per unit = (total assets - total liabilities) / number of units in issue
Suppose a pooled fund holds assets worth $52,000,000 and owes $2,000,000 in fees and other liabilities. It has 5,000,000 units in issue.
Net assets = 52,000,000 - 2,000,000 = $50,000,000.
NAV per unit = 50,000,000 / 5,000,000 = $10.00.
An investor who owns 200,000 units therefore holds 200,000 x 10.00 = $2,000,000, which is 200,000 / 5,000,000 = 4% of the fund. If the fund's assets rise by 10% to $57,200,000 with no change in liabilities, net assets become $55,200,000 and NAV per unit rises to 55,200,000 / 5,000,000 = $11.04.Case study
Seen in the real world.
Willowbrook Foundation is a fictional charity with $2,000,000 to invest for ten years. Its trustees consider buying a portfolio of shares themselves but realise that they lack the time and expertise to manage it. In this illustrative case, they choose a pooled equity fund charging 0.6% a year.
They calculate the annual fee as 2,000,000 x 0.006 = $12,000. The trustees compare that with the cost of paying a full-time analyst and decide the pooled fund is cheaper and gives them wider diversification.
Each year they review the fund's performance against its benchmark and read the manager's report. After three years, they conclude that the fund has met its goals and keep the investment, noting in the minutes that the fee of $12,000 a year is reasonable for the diversification and professional management received.
Watch out
Common mistakes.
- Ignoring fees. A fee of 1% a year takes a significant share of the return over a decade, because it is charged every year on the whole balance, whether the fund gains or loses.
- Assuming the fund is the same as a bank deposit. Its value can fall, and no guarantee protects the investor from losses.
- Not reading the dealing terms. Some pooled funds limit how often you can withdraw your money.
Questions
People also ask.
What does NAV mean?
Net asset value is the fund's assets minus its liabilities, and dividing it by the units issued gives the price of one unit.
How is a pooled fund different from a managed account?
In a pooled fund your money is mixed with others, while in a managed account your assets are held separately in your name.
Who can invest?
Some pooled funds are open to everyone, and others are limited to institutions or wealthy investors, depending on the rules that apply, so always check the eligibility terms in the offering document.
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