Building a portfolio means finding a strategy suited to your investment goals. For some investors, commingled funds are the answer. Commingled funds pool assets in a way similar to mutual funds. Here’s how to decide whether to commingle or not to commingle when it comes to your investments.
A financial advisor can help you create a financial plan for your investing needs and goals.
Commingled Funds Defined
A commingled fund, or pooled fund, is an investment vehicle that includes assets from multiple accounts. Individual investors typically can’t use commingled funds. Instead, your investment assets may combine with assets from multiple other investors inside a qualified retirement plan. For example, they may pool into a 401(k), or a pension plan sponsored by your employer.
Commingled funds have one or more fund managers. Typically, institutions actively manage these funds, meaning the fund manager takes a hands-on role. As a result, they decide how you should invest fund assets and when trades should occur. Commingled funds can hold stocks, bonds and other securities, similar to a traditional mutual fund.
Commingled Funds vs. Mutual Funds
Both commingled funds and mutual funds pool assets. Also, each has a fund manager who’s in charge of buying and selling investments. But some key differences set them apart.
First, commingled funds and mutual funds follow different regulatory guidelines. Mutual funds are regulated by the Securities and Exchange Commission (SEC) while commingled funds are not. Instead, they’re regulated by the Office of the Comptroller of the Currency.
Second, as a retail investor, your access to a commingled fund may be limited to your workplace retirement plan. Whereas with mutual funds, you can invest in them through your 401(k), individual retirement account or a taxable brokerage account.
Third, because of the way commingled funds are structured and regulated, they tend to be less transparent than mutual funds. For example, before you invest in a mutual fund you can download its prospectus. As a result, you can learn what the fund invests in, how it invests and what expenses you’ll pay. With a commingled fund, you’re not guaranteed to receive these kinds of disclosures. Consequently, you may be informed about your investments.
Commingled Fund Advantages
Commingled funds may carry lower investment costs compared to regular mutual funds. Their structure allows for lower overhead costs. Paying less in management or administrative costs for a commingled fund means you can reap more returns over time.
Commingled fund investors can benefit from the expertise and knowledge of active fund managers. If a fund manager has a solid track record that could potentially translate to higher returns for the investors. And it may be easier to access certain types of investments that would typically have a higher minimum buy-in if you were investing through a brokerage account.
Investing in a commingled fund through a workplace plan diversify your portfolio. Depending on the fund manager’s strategy, these funds may offer exposure to a variety of stocks, bonds and other investments. As a result, the can drive growth in your portfolio while also balancing out risk.
Commingled Fund Disadvantages
Commingled funds lack transparency. Since they don’t trade on a public exchanges, you may not always know how well a commingled fund performs. If you like to scrutinize historical returns or track price changes minute to minute, a commingled fund likely won’t appeal to you.
Another potential downside is the relative inability to liquidate assets in commingled funds quickly. Compared to other mutual funds, these funds may have fewer assets under management. That means you might have a harder time withdrawing money from the fund if you need to liquidate some of your holdings.
Should You Invest in Commingled Funds?
Are you just opening your 401(k)? Do you want to switch up your plan’s investment options? A commingled fund might be an option. However, it depends on how comfortable you feel with the lack of transparency and liquidity. Also, consider its value based on cost and performance.
When considering a commingled fund, ask for as much information as possible before you invest. Get copies of any disclosures that are available or pricing sheets. Then, review them carefully to see if the fund aligns with how you typically invest. That can help determine if a commingled fund fits your strategy.
Commingled funds are a less common way to pool investments. They share some features with mutual funds but differ in terms of regulation and structure. A commingled fund could complement your existing investment approach but it’s important to keep the pros and cons in sight.
- Consider talking to your financial advisor about commingled funds and where they might fit into your portfolio. Your advisor can walk you through the basics of how they work in more detail to help you decide whether to utilize them or not. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Whether you’re investing in commingled funds in a workplace plan or not, it’s helpful to review your plan contributions and investments at least once per year. For example, if you’re investing in a 401(k), it’s important to first make sure that you’re contributing enough to get the full company match. If not you might consider increasing contributions to get the full match. From there, you can look at how each fund performs and the fees you’re paying to decide if you want to hang on to them or swap them out for something different.
Photo credit: ©iStock.com/utah778, ©iStock.com/LPETTET, ©iStock.com/kate_sept2004