# Understanding Pooled Funds: Definition, Examples, Benefits & Drawbacks

> **Definition**
>
> Pooled funds are investment vehicles that collect capital from multiple individual investors to create a single portfolio.

## What Are Pooled Funds?

Pooled funds are funds in a portfolio from many individual investors that are aggregated for the purposes of investment. Mutual funds, hedge funds, exchange-traded funds, [pension funds](https://www.investopedia.com/terms/p/pensionplan.asp), and unit investment trusts are all examples of professionally managed pooled funds.

Investors in pooled funds benefit from diversification and [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp), which allow for lower trading costs per dollar of investment. Even though there are several advantages to pooled funds, there is the caveat of no individual control as well as the risk of additional costs. Understanding the pros and cons of this type of investment fund is vital for informed investing.

### Key Takeaways

*   Pooled funds aggregate capital from multiple investors to benefit from economies of scale and diversification.
*   Mutual funds are among the most well-known types of pooled funds and offer broad diversification to investors.
*   Pooled funds enable individuals to access investment opportunities generally reserved for large institutional investors.
*   Professional management in pooled funds helps investors maximize their risk-return tradeoff.
*   Commissions, annual fees, and limited control over investments are potential drawbacks of pooled funds.

## Understanding the Fundamentals of Pooled Funds

[Investment clubs](https://www.investopedia.com/ask/answers/benefits-of-investment-club-and-how-to-find-one/), 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—discounted—prices.

[Mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) are among the best-known of pooled funds. Actively managed by professionals, unless they are index funds, they spread their holdings across various investment vehicles, reducing the effect that any single 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 to invest 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.

## Pros and Cons of Investing in Pooled Funds

### Pros

With pooled funds, groups of investors can take advantage of opportunities typically available only to 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](https://www.investopedia.com/terms/u/underperform.asp).

Professional management ensures investors get the best risk-return balance while meeting the fund's goals. This management helps investors who may lack the time and knowledge for handling their own investments entirely.

Mutual funds, in particular, offer a range of investment options for the highly aggressive, mildly aggressive, and risk-averse investor. Mutual funds allow for the reinvestment of [dividends](https://www.investopedia.com/terms/d/dividend.asp) and interest that can purchase additional fund shares. Investors save money by avoiding transaction fees for holding the fund's portfolio securities, helping grow their portfolio.  

Pros

*   Diversification lowers risk.
    
*   Economies of scale enhance buying power.
    
*   Professional money management is available.
    
*   Minimum investments are low.
    

Cons

*   Commissions and annual fees are incurred.
    
*   Fund activities may have tax consequences.
    
*   Individual lacks control over investments.
    
*   Diversification can limit upside.
    

### Cons

When money is pooled, individual investors have less control over decisions compared to investing alone. Group decisions may not be ideal for every individual investor. 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 reduce potential losses.

When investing in a professionally managed fund, an investor 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 (AUM), fees reduce a fund's total return.

Some mutual funds also charge a load or sales charge. Funds will vary on when this fee is billed, but the most common are front-end loads—paid at the time of purchase, and back-end loads—paid at the time of divesting.

Investors must file and pay taxes on distributed [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) from the fund. These profits are spread evenly among all investors, sometimes at the expense of new shareholders who did not get a chance to benefit over time from the sold holdings.

Frequent sale of fund holdings may lead to annual capital gains distributions, raising taxable income for investors.

## Real-World Examples of Pooled Funds

The [Vanguard Group](https://www.investopedia.com/vanguard-review-4587932), Inc. is one of the world's largest investment management companies and providers of retirement plan services. The firm offers hundreds of different mutual funds, ETFs, and other pooled funds to investors around the world.

For example, its Canadian subsidiary, Vanguard Investments Canada, offers Canadian investors many pooled fund products. These products include 39 Canadian ETFs and four mutual funds, along with 12 target retirement funds and eight pooled funds—the two latter groups are available to institutional investors.

One of the pooled funds, Vanguard Global ex-Canada Fixed Income Index Pooled Fund (CAD-hedged), invests in foreign bonds. In April 2019, [it took a new benchmark](https://www.newswire.ca/news-releases/vanguard-global-ex-canada-fixed-income-index-pooled-fund-cad-hedged-transitions-to-new-bloomberg-barclays-benchmark-864758535.html)—the Bloomberg Global Aggregate ex-CAD Float Adjusted and Scaled Index—to take advantage of including the Chinese government policy bank bonds in its Canadian portfolio offering.