Commingled Fund - Explained
What is a Commingled Fund?
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Table of ContentsWhat is a Commingled Fund?How Does a Commingled Fund Work?Academic Research for Commingled Fund
What is a Commingled Fund?
A commingled fund is a type of investment fund which invests the capital of its participants in other different investment funds. An investment fund can directly invest in financial products like stocks and bonds. Commingled funds don't invest directly in such assets but instead invest in other investment funds which then usually invest in these assets.
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How Does a Commingled Fund Work?
An investment fund is regarded as a commingled fund if a majority of its funds is invested in other investment funds. Also, this type of fund is required by the law to invest a minimum amount in two different investment funds without this investment exceeding 45% of the primary assets of the funds in any of them to be considered a commingled fund. A commingled fund is exempted by law from the fiscal penalty of leaving an investment fund. These commingled funds are created with the aim of optimizing results. They reduce both monetary costs and time and effort costs since it is easier to analyze how a fund behaves than analyzing the evolution of the set of assets that make up its portfolio. The commingling funds increase profits because they create time to spend conducting an in-depth analysis of the assets that the managers consider more appealing. Some of the advantages that funds of funds provide investors with include:
- It allows the investment of individuals to be diversified in different funds. An investor having limited capital may not be able to make an adequate diversification, but he can hire a commingled fund to carry out this diversification.
- Fewer conflicts of interest. The funds of funds are more independent than average investment funds since they have funds from various entities and so it is difficult for there to be conflicts of interest.
- Managers are specialized in the analysis and selection of funds. Usually, the fund managers are specialists in selecting and analyzing funds. They are experts in that field and not just managers of traditional investment funds.
The commingled funds also possess some various disadvantages to the investors. These include:
- Higher commissions: Investing in different funds requires the payment of more commissions.
- They may not be independent: If a commingled fund decides to invest in the funds of the same financial group, the risk would significantly increase.
- The investor does not control which assets he invests in: An investor is aware of the type of funds he invests in but has no control over the assets that these funds operate and this makes it a depersonalized investment.