Basics     Money Myths

“Pooled funds are an efficient way to diversify.”

POSTED ON JUNE 11, 2021    

The myth

Pooled funds are a type of investment product in which the money of different people is combined and used to buy assets that could help the fund achieve its goal.

 

The most common examples of pooled funds are mutual funds and Unit Investment Trust Funds (UITFs).

 

These can contain many different outlets, issuances, securities and assets, which is why some people believe that they are an efficient way to diversify a portfolio.

 

Why do people believe it?

There are a lot of good things that can be said about pooled funds, including how they have professional managers who take care of the research, monitoring and decision-making, and ultimately call the shots where investors’ money will  be invested in, so long as they are within the funds’ approved investment universe.

 

The fund managers choose a mix of assets which they think may give good returns and allow the fund to achieve its objective while matching the fund’s and the investor’s intended risk profile suitability.

 

For more risk management, these professionals may try to choose assets from different industries. This step can decrease the chance that an event which negatively affects one industry (for example, the property industry) will hit the fund very hard.

 

Risks of believing this myth

While fund managers practice some form of diversification when they choose the assets, this may not be enough for your situation.

 

While diversification can be done through selecting assets from different industries, it may also happen when you choose different asset classes as well. For example, a drop in the stock market would affect all stocks to a certain degree but may not have much impact on bonds.

 

Relying only on the diversification of a pooled fund may not allow you to manage risk as much you’d like. This is especially true if you have other investments aside from the fund that are in the same asset class.

 

Verdict: It depends.

While the assets in a pooled fund are usually diversified by industry, they may not be diversified by asset class. In fact, some funds specialize in certain asset classes (like bond and index funds).

 

On the other hand, balanced funds usually aim for a combination of growth and income by mixing equity (stocks) and debt instruments such as bonds in their portfolio. Investing in a balanced fund would give you a certain level of asset class diversification.

 

Starting your investing journey with a pooled fund is a good way of enjoying some of the benefits of diversification. However, as you progress and put your money in other investment products, you’ll need to check the assets you have just to manage your risk even more.

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