A pooled fund can be offered through banks, investment management firms, trust companies, insurance companies, or other organizations. Fees that have to be paid for administration and management are divided into the sales charge and the annual operating expenses.
The sales charge depends on the way the fund is distributed and is a “one-time” charge for specific transactions such as purchasing, while the annual operating expenses that include the management fee, distribution fee and other expenses are debited annually from the investors’ fund balance.
In return for depositing funds, the investors receive units or shares of the fund, which represent a pro-rate share of the fund’s investments. The fund investor achieves a higher degree of diversification than an individual could achieve, but at a lower cost.
An individually managed portfolio can also achieve diversification, but the extent of diversification will be limited by available funds. For relatively small amounts of available investment funds, adequate portfolio diversification comes with significant transaction costs.
Pooled funds can either be open-ended or closed-ended. Stable-valued pooled funds behave similarly to mutual funds, but they differ in their legal form under securities law. Stable-valued pooled funds are exempt from registration as securities with the Securities and Exchange Commission.