Basics Of Pooling Investments for Maximum ROI
By: Realty Mogul Blog Repost
What is a Pooled Investment Vehicle?
As its name suggests, a pooled investment vehicle (PIV), sometimes called a pooled fund, is an investment fund raised by pooling small investments from a large number of individuals. One common type of a pooled investment vehicle is a mutual fund.
The professional management team responsible for a pooled investment vehicle combines these individual investments into a single large fund that is then deployed for investment purposes. The group of individual investors are all stakeholders in every investment the fund makes, in proportion to the size of each individual’s investment in the fund.
Pooled investment vehicles are sometimes organized as standalone companies, and in other cases they are arranged and managed as entities within a larger business, such as a brokerage house.
What are the Benefits of a Pooled Investment Vehicle?
One way to understand the advantages of a pooled investment vehicle is to consider the healthcare industry. Often, small companies that need to purchase health coverage for their employees find that the options available to businesses of their small size are unsatisfactory. The premiums are high, the choices of plans are limited, and the administrative costs are too burdensome.
So these small companies will often band together with other small businesses — effectively pooling their employees into a single large entity for the purposes of acquiring health insurance. Typically, these companies work through a professional employer organization — a business that helps aggregate these groups of small health-insurance customers into one large buyer, helps them negotiate a better deal for coverage, and then helps to professionally administer the health plans for each company.
The key benefits for these small businesses seeking health insurance, then, are as follows:
Negotiating Power
Small companies, which alone do not have the negotiating leverage to purchase the plan they want at the price they want, now have much more negotiating power because they are part of a large group of buyers.
Increased Choice
Even though this pool of small businesses has banded together to act as a single large healthcare customer, each individual company in the pool will have its own needs and goals. But because they are acting as one large-scale entity, this pool will still be able to negotiate better rates and terms for various types of plans for its different member companies.
Indeed, because they are part of a large group, some of these small businesses will have access to plans they wouldn’t if they approached the insurance company alone.
Professional Management
Because they have joined this pooled healthcare vehicle under the management of a professional employer organization, these small businesses now have access to professional management and administration of their healthcare plans, a service not part of the core competency of any one of these small businesses and which would likely not have been cost-effective for any of them to hire directly just for their own company.
Pooled investment vehicles work in a very similar way, providing similar benefits to individual investors that pooling employees does for small businesses seeking to buy health insurance. When individual investors place a relatively small amount of capital in a pooled investment vehicle, then, they can benefit from:
Economies of Scale
Because the pooled investment vehicle allows the entity to make larger-scale investments, the costs of buying and selling shares goes down per dollar invested. You can think of this as similar to the increased negotiating power of a large customer (such as in our healthcare example) over a smaller-scale buyer.
Diversification
Just as in our healthcare example, where the larger combined entity enjoys access to a greater number of health plans than would any individual small business, when you participate in a pooled investment vehicle you will have access to a larger number of investment opportunities. This is because the pooled fund is large enough that it can deploy its capital across a far broader range of investments than any of the fund’s individual investors could with the small amount of money they placed into the fund. This allows a pooled investment vehicle, if its managers so choose, to diversify the fund’s exposure to industries, businesses or asset classes. Moreover, every individual investor can participate in the potential for returns on every investment made through the fund.
Professional Management
When you participate in a pooled investment vehicle, your investment is managed by a team of professional fund managers. Unless you are an expert in the financial markets or are extremely confident in your own ability to devise a winning investment strategy, this professional management can be a benefit in that it allows you — with only a small outlay of your own capital — to tap into the experience and knowledge of a team of investment professionals whose fees and reputation depend in part on how well they manage your fund.
