Understanding Pool Funds

Pool funds, like mutual funds, co-mingle investor funds for purposes of investing. Investors hold units in the pool fund, and ideally the unitholder (investor) achieves lower costs for portfolio diversification and benefits from efficiencies of scale. Pool funds are also designed to achieve fairness of allocation across clients.

Pool funds must annually distribute all interest income, dividends, and net capital gains. Capital losses are not distributable but are used to net against capital gains. Note that an annual distribution is unrelated to the unit value. You can also experience capital gains when you sell units of the pool. This can be confusing at times because there can be years when capital gains distributions are made due to sales inside the pool fund, while the unit value may have experienced a decline in value.

Regardless of when you buy units of a pool, annual distributions are completed pro rata. This means that if, as an investor, you purchase units in November and there is a year-end distribution, your distribution per unit is the same as an investor who purchased units in January of the same year. For this reason, you want to understand what the estimated distribution for year-end will be should you choose to buy units in the last quarter of the year. You do not want to be hit with a surprisingly large distribution when you were not invested for very long.

Watch the video above for a better understanding of pool funds.

 


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