Investing your money in a pooled investment vehicle is an alternative option to trading individual stocks in the stock market. Various methods are available to pool money for investment, each with its benefits and drawbacks.
When building your portfolio and striving towards your investment objectives, it is worth considering the potential impact of pooled investments. Additionally, consulting a financial advisor can provide valuable insights into how these investments can be integrated into your overall portfolio.
What Is a Pooled Investment Vehicle?
A pooled investment vehicle (PIV), also known as a pooled fund, is an investment fund that gathers small investments from numerous individuals. One popular form of pooled investment vehicle is a mutual fund.
The professional management team in charge of a pooled investment vehicle combines these individual investments into a single large fund, which is then used for investment purposes. Each investor in the group has a stake in all the fund’s investments, proportionate to their investment size.
Pooled investment vehicles can be organised as independent companies or structured and managed as entities within a larger business, like a brokerage house.
Basic Benefits Of Pooled Investment Vehicle
Once you have understood what is a pooled investment vehicle, naturally, you would want to know if it is beneficial. Here is the answer to that:
Pooled investment vehicles allow investors to diversify their portfolios easily. By pooling funds from multiple investors, these vehicles invest in a wide range of securities across different asset classes, sectors, and geographies. By investing in such vehicles you can reduce the risk associated with investing in individual securities and enhance the potential for long-term growth.
Pooled investment vehicles are managed by experienced investment professionals who conduct research, analyse market trends, and make informed investment decisions on behalf of the investors. This will relieve you of the burden of constantly monitoring and managing their investments.
Access to a Variety of Assets
Pooled investment vehicles provide access to a wide range of assets that may not be readily available or affordable for individual investors. These assets can include stocks, bonds, commodities, real estate, and international securities.
Pooled investment vehicles benefit from economies of scale. By pooling funds from multiple investors, these vehicles can negotiate lower transaction costs, brokerage fees, and administrative expenses.
Pooled investment vehicles, especially mutual funds and ETFs, offer liquidity to investors. You can typically buy or sell fund units at the prevailing Net Asset Value (NAV) on any business day. This liquidity feature provides flexibility and allows you to access their investment capital.
Pooled investment vehicles offer systematic investment options, such as systematic investment plans (SIPs) or cost averaging. These plans allow you to invest a fixed amount at regular intervals, regardless of market conditions. Systematic investment helps reduce the impact of market volatility and allows you to benefit from the power of compounding over the long term.
Transparency and Regulatory Oversight
Pooled investment vehicles are subject to regulatory oversight and reporting requirements. Fund managers are required to disclose information about the fund’s holdings, performance, expenses, and investment strategies regularly. This transparency helps you make informed decisions.
Pooled investment vehicles offer a range of options to suit different investor preferences and goals. You can choose funds based on their risk tolerance, investment objectives, time horizon, and asset class preferences.
Types Of Pooled Investment Vehicles
A pooled investment vehicle is quit beneficial for any investor but it is also important for them to know the types of pooled investment vehicles available so that they can choose the best one.
Mutual funds are the most common type of pooled investment vehicle because they require investors little effort or research. They are open-ended, meaning new shares can be issued or redeemed on demand by the mutual fund company.
Mutual funds are professionally managed and invested in stocks, bonds, and other securities, allowing investors to benefit from economies of scale. Fund managers can do passive investing and try to perform within the same range of indexes.
They can also take an active approach and try to outperform the indexes. It should be noted that since active investing is more hands-on, it is typically more expensive. It also requires a higher level of expertise and frequent trading, which can incur additional costs.
ETFs are similarly pooled like mutual funds but trade on the stock exchanges like individual stocks. They are more liquid —investors can buy or sell ETFs during regular trading hours on any given day, unlike mutual funds which only allow transactions at the end of the trading day.
Additionally, because ETF shares trade like stocks, managers can use more sophisticated strategies such as short-selling and margin trading that may not be available with other types of pooled investment vehicles.
ETFs also track an index passively or actively, but they may also hold specific industries, such as technology and healthcare, or particular countries and regions. This makes ETFs more specialized than traditional mutual funds and gives investors greater flexibility.
Lastly, ETFs generally charge lower expense ratios than mutual funds.
Hedge funds are investments that use sophisticated strategies such as leveraging, arbitrage, and short-selling to generate returns. These strategies can be very risky and often require a high level of expertise to manage successfully.
Unlike mutual funds and ETFs, they are not open to the general public and are reserved for accredited managers and investors who meet certain criteria and understand the associated risks. Hedge funds also usually have a minimum investment amount.
As such, they typically charge higher performance and management fees. This makes them much more expensive than other pooled investment vehicles. However, in some cases, these higher costs may be worth it if the fund manager can generate significant returns.
Private Equity Funds
Private equity funds are similar to hedge funds but focus on investments in private companies such as startups and venture capital.
They require a high minimum investment amount and have complex legal structures that make it difficult for investors to understand their fees and other related information.
These vehicles can be risky since there is no public market for private company stock. However, because of the higher risk involved, private equity funds may offer greater potential returns than other pooled investment vehicles.
Real Estate Investment Trusts
REITs are pooled investments that allow investors to access the real estate market without buying properties directly. Like ETFs, REITs are traded on stock exchanges, holding a portfolio of income-producing properties such as office buildings, apartments, or malls.
Investors benefit from these properties’ dividends and exposure to the real estate market. Furthermore, some REITs specialize in specific real estate sectors such as healthcare or data centers — allowing for more targeted investment strategies.
The main difference between REITs and other pooled investment vehicles is that REITs focus solely on real estate-related investments. As such, investors must be wary of additional risks, like changing market trends, interest rate fluctuations, and tenant turnover.
Pension funds are investment vehicles set up by employers to provide retirement benefits to their employees. This pooled investment is designed to accumulate assets over the long term to ensure pensions are covered and potentially increase benefits to retirees.
As such, pension funds typically have low-risk portfolios that focus on steady growth rather than aggressive strategies. Their investments may include stocks, bonds, real estate, commodities, derivatives, and other assets.
Pension funds are managed by organizations, often with contributions from both employer and employee. They offer tax advantages as contributions may be deductible against taxable income, and gains will not be taxed until withdrawal at retirement.
FAQ: Pooled Investment Vehicle
Is a private equity fund a pooled investment vehicle?
Yes, a private equity fund is a type of pooled investment vehicle. Private equity funds are investments in businesses that are not publicly traded. These funds collect capital from investors and then use the money to buy or invest in operating companies, real estate projects, venture capital opportunities, and other investments.
How does a pooled investment vehicle work?
Pooled investment vehicles work by collecting money from investors and using the funds to purchase a variety of investments. The returns each investor receives depend on their contribution and the performance of the underlying investments held in the fund.
What are the risks of pooled investment vehicles?
The main disadvantage of pooled investment vehicles is a lack of control over asset allocation. In addition, some funds may have lower liquidity than traditional investments and there can be potential tax consequences associated with investing in a pooled vehicle.
Pooled investment vehicles offer individuals and organizations the opportunity to invest their money collectively, pooling resources to access a wider range of investment opportunities.
By joining forces with others, investors can benefit from professional management, diversification, and economies of scale that may not be available to individual investors.
Whether it’s a mutual fund, hedge fund, or private equity fund, pooled investment vehicles provide a convenient and efficient way to invest in various asset classes and achieve potential returns.
So if you’re looking to maximize your investment potential, consider exploring the different types of pooled investment vehicles available and find the one that best aligns with your financial goals. Happy investing!
For investors looking to make a positive impact while seeking financial returns, SustVest offers a range of socially responsible investment options. Choose SustVest to invest in a better future for both your portfolio and the planet.
Founder of Sustvest
Hardik completed his B.Tech from BITS Pilani. Keeping the current global scenario, the growth of renewable energy in mind, and people looking for investment opportunities in mind he founded SustVest ( formerly, Solar Grid X ) in 2018. This venture led him to achieve the ‘Emerging Fintech Talent of the Year in MENA region ‘ in October 2019.