Pooled Investments

Types and Characteristics of Pooled Investments

In the securities industry, there are many ways to refer to the same thing. What some call a "pooled investment vehicle" others refer to as a "packaged product" or a "mutual fund."

Whatever we call these investments, a pooled investment vehicle pools the capital of many investors together, with that capital then managed by a professional. Rather than investing directly in a company, investors buy investment products that come with various features.

The best-known pooled investment vehicle is the mutual fund. While some investors buy shares of SBUX, many prefer to own shares of a mutual fund that devotes a percent of the portfolio to SBUX and other large-cap stocks. Similarly, rather than putting $100,000 into one issuer's bonds, many investors prefer the diversification and professional management offered by a bond fund.

 

A mutual fund is an investment portfolio managed by an investment adviser. Investors buy shares of the portfolio. The adviser uses the money from investors to invest in stocks and bonds. When an investor sends in money, the portfolio gets bigger, but it also gets cut into more slices to accommodate the investment into the fund. The only way for the slices to get bigger is for the portfolio to become more valuable. The portfolio value rises when securities in the fund increase in market value and when they pay income to the portfolio.

That is the same way it happens in any securities account. When the market values of the securities in the account drop, the account value is down for the day unless income is received that outweighs the drop. For example, if an account was worth $100,000 when the markets opened and then just $98,817 when the markets closed, the investor is down for the day. . Unless he happened to receive dividends and interest of more than that decline of $1,183.

There are two main advantages of owning stocks and bonds through mutual funds as opposed to owning them directly. The first is the professional portfolio management. The second is diversification. If an investor has $400 to invest, he can't take a meaningful position in any company's stock, and even if he tried, he would end up owning just one company's stock. Common stock can drop in a hurry, so we never put all our money in just one or two issues. Diversification protects against this risk, and mutual funds own stocks and bonds from many different issuers, usually in different market sectors. So, even a small investment is diversified, while a common stock investor with a small amount would risk everything on just one issuer.