Pooled Funds Definition

Pooled funds is a generic term for a portfolio of money from many individual investors that is aggregated for the purposes of investment. Mutual funds, exchange-traded funds, pension funds, and unit investment trusts are all examples of professionally managed pooled funds. Investors in pooled funds, benefit from economies of scale, which allow for lower trading costs per dollar of investment, and diversification.

Groups such as investment clubs, partnerships, and trusts use pooled funds to invest in stocks, bonds, and mutual funds. The pooled investment account lets the investors be treated as a single account holder, enabling them to buy more shares collectively than they could individually, and often for better (i.e., discounted) prices.

Mutual funds are among the best-known of pooled funds. Managed by professionals (unless they are index funds), they 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.

Another type of pooled fund is the unit investment trust. These pooled funds take money from smaller investors and invest it in stocks, bonds, and other securities. However, unlike a mutual fund, the unit investment trust does not change its portfolio over the life of the fund and invests for a fixed length of time.

With 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. Because funds contain hundreds or thousands of securities, investors are less affected if one security underperforms.

The professional managment, ensuring investors receive the best risk-return tradeoff aligning with their objectives, helps investors who lack the time and knowledge for handling their own investments. Mutual funds in particular offer a range of investment options for the highly aggressive, mildly aggressive and risk-adverse investor. 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.

When money is pooled into a group fund, the individual investor has less control over the group’s investment decisions than if he were making the decisions alone. 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.

When investing in a professionally managed fund, an investor completely gives up control to the money manager running it. In addition, he incurs additional costs in the form of management fees. Charged annually as a percentage of the assets under management, fees drag down a fund's total return.

Some mutual funds also assess a load, or sales charge, when they are purchased or sold.

An investor is taxed when the fund sells individual stocks and distributes capital gains. These gains are spread evenly among all investors, sometimes at the expense of new shareholders. 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).