Table of Contents
- Pros and Cons of a Pooled Investment Vehicle
a. Negotiating Power
b. Professional Management
a. Management Fee
- Examples of Pooled Investment Vehicle
a. Mutual Funds
b. Exchange-Traded Funds
c. Real Estate Investment Trusts (REITs)
Pooled Investment refers to a group of investors injecting funds into a common pool to buy shares or units of an investment product/company. Generally, a pooled investment vehicle is one large portfolio of investment assets funded by numerous investors. Investors of these Pooled Investment Vehicles obtain their returns in the form of dividends or interest distributions and/or price appreciation as the investment’s per-share or per-unit price rises.
Typically, a pooled investment vehicle is managed by a team comprising portfolio managers and analysts. This group of professionals are generally subject matter experts in a certain field or industry, where they invest on their investors’ behalf In return for rendering such a service, investors are required to pay the fund manager a management fee.
Pros and Cons of a Pooled Investment Vehicle
When funds are pooled together from individual investors, it increases the range of investment opportunities available. In addition, larger investment funds have better negotiation power when it comes to purchasing assets as they face less competition.
When investing in a pooled investment vehicle, investors are putting their money under the management of money managers; industry professionals who devote the majority of their time researching and analysing various industries. In addition, management fees are usually charged as a percentage of the Pooled Investment Vehicle’s gross asset value.
Investing in a Pooled Investment Vehicle can save an individual a lot of time. The tedious process of conducting a thorough due diligence on investment opportunities falls on the investment manager of the fund. In addition, the fund manager will provide you with timely updates on the fund performance.
In a Pooled Investment Vehicle, the fund is typically large enough to enable investors to gain access to a broader range of investments than a single individual investor. A larger pool of funds means the possibility of diversifying across various industries, businesses, geography and asset classes.
One of the downsides of having your money professionally managed is that you are required to pay management fees. These fees do eat into the returns.
Examples of Pooled Investment Vehicle
Mutual Funds, Exchange-Traded Funds (ETFs), and Real Estate Investment Trusts (REITs).
A mutual fund is a type of financial vehicle that invests in securities like stocks, bonds, money market instruments, and other asset classes. Mutual funds are a type of open-ended investment, which means the company that runs the fund can create new shares or units on demand to sell to investors. The fund also reserves the right to buy back the shares or units from investors.
Mutual funds can be actively or passively managed by money managers. In actively managed mutual funds, the money managers typically use the S&P 500 as the benchmark and try to beat its corresponding returns by actively making decisions about what assets to buy and sell within the fund. Thus, active investing involves taking a hands-on approach by a portfolio manager. Portfolio managers use their experience, knowledge, and analysis to make choices about what to buy or sell in the portfolio.
On the other hand, passive investing generally involves investing over the long term with very limited buying and selling within the portfolio. A passively managed mutual fund tracks an index such as the S&P 500 or NASDAQ, and attempts to match its performance. Thus, in general, such passively managed funds are not expected to outperform the market, but rather, perform in line with the market. Another notable difference is that actively managed funds have higher management fees than passive funds that just track on index. The former usually charge a performance fee on top of a base fee.
An exchange-traded fund (ETF) is a hybrid of a mutual fund and a company stock. ETFs comprises a portfolio of investments that can include stocks, bonds, real estate and commodities. The difference between a mutual fund and an ETF is that while the price of a mutual fund is set once per day at the close of trading, an ETF is traded throughout the day on the exchange just like any stock. The price of an ETF is influenced by stock market volatility.
Similar to a mutual fund, as explained above, an ETF can also be passively or actively managed. In an actively managed ETF, money managers will use an index as a benchmark and try to beat the index. Conversely, in a passively managed ETF, fund managers will try to replicate the return of the said index. ETFs tend to have a lower expense ratio as compared to mutual funds. For example, SPDR S&P 500 ETF Trust (SPY) is an ETF that tracks the S&P 500 and is one of the largest and most heavily-traded ETFs in the world.
Real Estate Investment Trusts (REITs)
In a REIT structure, a company pools money from various investors, including individuals and institutions, and uses the pooled money to purchase several real estate opportunities to form a portfolio of properties.
REIT is one of the most popular investment vehicles among investors because it allows investors to invest in real estate with smaller amounts without having to manage the property. A REIT company buys properties to invest in, and investors buy shares of the REIT. REIT also helps investors to diversify because it owns a basket of properties which helps investors to eliminate concentration risks. REITs listed in Singapore (S-REIT) are particularly attractive to individual investors as any distribution that they receive is not subjected to personal income tax. Moreover, any S-REIT that pays out at least 90% of their distributable income will be exempted from paying Singapore corporate income tax. (However, any distributable income that is retained by the REIT is subjected to corporate income tax).
REIT structure, Source: Moneysense
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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.