What Are Pooled Funds?
Money from individual investors combined for investment purposes
Pooled funds is a term used to collectively refer to a set of money from individual investors combined, i.e., “pooled” together for investment purposes. The funds are combined with the intention of benefiting from economies of scale through cost minimization. Some examples of pooled funds include, but are not limited to, hedge funds, mutual funds, and pension funds.
The rationale behind instituting pooled funds is to benefit from economies of scale that arise out of gathering large funds from several individual units. The benefit comes in the form of cost minimization and expansion of investment opportunities.
Pooling funds together is an attractive option for investors because it makes new investment opportunities available to them. Collectively, they are able to purchase more shares than they can as an individual investor with a lesser amount of money.
How They Work
Pooled funds work in a very basic fashion, just like any other investment fund. Money from several individual investors is aggregated into one single account or pooled investment account. The investments out of the funds are treated as though they were from a single account holder.
Importance of Pooled Funds in Universal Banks
1. Opens new investment opportunities
As mentioned earlier, pooled funds are an attractive option for investors because they open up new investment opportunities that were not initially available to them as an individual investor.
2. Economies of scale
Pooled funds bring economies of scale in the form of larger, better investment opportunities, along with cost minimization.
Pooled funds are considered a very profitable investment opportunity. It is because of the large amount of funds available in a single account that enables investors to create a diverse portfolio. A diverse portfolio allows investors to reap the benefits from different sources of investment.
4. Low exposure to risk
When several individual investors combine funds, it makes a substantial amount of money available for future investments. Hence, the availability of more funds allows investors to invest in several securities. Hence, if an investment underperforms, the risk is covered by the diverse portfolio of investments available to them.