Pooled Funds Vs. Mutual Funds

Birds of a feather, pooled funds and mutual funds may seem indistinguishable.
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Mutual funds, a well-known example of an investment vehicle that commingles the monies of many different investors, are one type of pooled fund. Also in this family are a variety of funds offered by investment management outfits, insurance companies and trust companies. They share certain basic traits while having their own distinctive stamp.

If It Looks Like a Pooled Fund...

As financial education website Financial Pipeline points out, pooled funds and mutual funds share some fundamental similarities. Pooled funds, which the site classifies as unit trusts, invest the moolah deposited by individual investors in a diverse array of securities that are managed by a third party. Mutual funds, like pooled funds, are organized as trusts that are based on a trust indenture -- an agreement that identifies the investment policy of the fund, the parties involved and the way fees are charged. In exchange for monies deposited, investors receive units or shares of the fund.

Pooled Fund Menagerie

The Investment Company Institute, an association of U.S. investment companies, provides an overview of some of the pooled funds you might encounter. A unit investment trust, it says, is offered by investment companies that pool investor money and invest it in various stocks and bonds under the direction of a fund manager. Open-end investment companies, or mutual funds, are similar to unit trusts, except that they are also companies with boards of directors. Both open-end investment companies and unit trusts have management fees. Closed-end funds are listed companies that pool investor monies to invest in other companies. Unlike the other pools, they cannot change the number of shares and they can borrow money.

And Walks Like a Mutual Fund...

Mutual funds, as a particular type of pooled fund, hold onto a portfolio of stocks and bonds that have been selected by a professional money manager, and they sell shares of the fund to investors. The shares represent proportionate ownership of the fund and may be redeemed at any time at current net asset value, which is the total value of the underlying securities, less liabilities, over the number of shares outstanding.

Two of a Kind

Pooled funds can be either open end or closed end: The former allows for redemption of units at scheduled valuation intervals, and the latter does not. Closed-end funds tend to hold illiquid assets such as real estate, according to Financial Pipeline, or they take the form of hedge funds. Legally, pooled funds and mutual funds have different obligations: The latter, as public securities, must distribute a prospectus to investors; the former, being private placements and available only to sophisticated investors, are off the hook. Other than these administrative formalities and the lower activity and fees of pooled funds, mutual funds and pooled funds with the same investment objectives are virtually identical.

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