Pooled Investment Vehicle - Explained
What is a Pooled Investment Vehicle?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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What is a Pooled Investment Vehicle?
When investors pool together their funds to gain advantages of a bigger investment sum, advantages that meagre monetary resources wouldn't bestow, its called a Pooled Investment Vehicle (PIV). All kinds of funds like pension funds, mutual funds, hedge funds, unit investment trusts, as well as private funds, can be bought via Pooled Investment Vehicles.
How Does a Pooled Investment Vehicle Work?
Common types of pooled investment vehicle include:
Mutual Funds: Managed by a professional, who invests the pooled money in different underlying assets on behalf of the investors in the mutual fund.
Pension Funds: An account opened by employers on behalf of employees to save their retirement funds or provident funds.
Private Funds: Not recognized as investment firms by the Securities Exchange Commission (SEC), these include private equity funds and hedge funds.
Unit Investment Trusts (UIT): This is a time bound fund with a fixed portfolio sold in units to investors. Like mutual funds, UITs invest in a range of assets to diversify the investment portfolio, but these assets do not change over the lifetime of the UIT, rather the UIT expires after a set period.
Hedge Funds: These are risky undertakings that use pooled money from clients to invest in high risk-high return assets, exotic securities, using techniques like shorting, and other long term strategies aimed at maximizing returns, a.k.a alpha returns.
Advantages of Pooled Investment Vehicles
- Pooled resources can be invested in diverse assets that would be out of reach of a single investor.
- It facilitates portfolio diversification as access to a larger pool of money opens up more investment possibilities.
- Theres considerable saving on transactional costs.
Disadvantages of Pooled Investment Vehicles
- Individuals have less say over the final investment decisions.
- Conflicting interests, goals, and expectations amongst group members can lead to a glitchy investment strategy resulting in poor returns.
- Every investment requires group consensus, which might be cumbersome at best, and extremely difficult and at worse with lost opportunity costs, especially in volatile market scenarios.