Commingled Funds

What are Commingled Funds?

Commingled Funds are professionally managed funds that are usually offered in retirement accounts (401(k)) that combine assets like bonds and equities from multiple accounts and manage the pool as one account, rather than managing each individual accounts separately.

Commingled Funds

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Source: Commingled Funds (wallstreetmojo.com)

Examples

You can download this Commingled Funds Excel Template here – Commingled Funds Excel Template

Example #1

Consider a group of 10 investors come together to a fund manager to get their individual accounts managed separately. As managing individual accounts can be operationally challenging and expensive, the manager tells these people that he will treat this money as one single pool and whichever assets he will buy from the pool will be divided proportionally based on the capital of each account to the combined capital of all the accounts. Also, individual assets will be apportioned to separate accounts on the reporting date, based on overall allocation ratios of assets in the pooled account.

Example #2

Let’s assume that three investors (A, B and C) with the capital of $40,000, $60,000 and $100,000 invest in a commingled fund that has only these three accounts. The ratio of their capital in the entire pool ($200,000) is 20:30:50. The fund manager takes the pool and invests in three asset classes, namely stocks, bonds, and treasuries.

A year later, the pool grows to 250,000, and the allocation to three asset classes stood at 40%, 50%, and 10% for stocks, bonds, and treasuries, respectively. At this time, the manager reports the performance and the current state of a portfolio to respective investors. The return on individual accounts is reported to be the same as the return on pooled investments (25% in this case).

This return gives the end of the year-end values of the individual accounts. The manager then reports the assets in these accounts in the same proportion as they were in the pooled account to ascribe different assets in individual accounts. Refer to the below illustration:

Commingled Funds Example

Advantages of Commingled Funds

Disadvantages

Limitations

Important Points

This has been a guide to what are commingled funds and its definition. Here we discuss its examples, how it works along with advantages, and disadvantages. You can learn more from the following articles –

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