Pooled investments are the combined funds from many individual investors, for the purpose of investment. The most common examples of pooled investments are professionally managed, such as Exchange Traded Funds (ETFs), Hedged Funds, Unit Trusts and Managed Funds.
By investing in pooled investments, you can benefit from economies of scale which can provide lower trading costs and increased diversification.
Advantages
With pooled funds, groups of investors can take advantage of opportunities typically available to only 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.
The professional management helps to make sure investors receive the best risk-return trade-off while aligning with their work with the fund’s objectives. This management helps investors who may lack the time and knowledge for handling their own investments entirely.
Disadvantages
When investing in a professionally managed fund, an investor gives up control to the money manager running it. In addition, they incur 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.
Dimensional Funds Australia and the managed investment options they provide and that we recommend, is an example of a pooled investment.