What Is a Commingled Fund? Unraveling Investment Strategies and Opportunities

A commingled fund is an investment vehicle where money from different investors is ‘commingled’ or pooled together into one fund. When you invest in a commingled fund, you essentially pool your money with other investors and entrust the fund manager to make investment decisions on your behalf.

Commingled funds are designed to provide a cost-effective and diversified investment strategy. By pooling resources, these funds can lower administrative and management costs and gain access to a broader range of investment opportunities. This pooling of resources allows for greater diversification and professional management, which can be particularly advantageous for large institutional investors such as pension funds, endowments, and insurance companies in addition to HNIs and UHNIs.

Let us understand the nuances of these funds, including their structures, advantages, and disadvantages that are crucial for making informed investment decisions.

Let’s start with exploring the similarities between Commingled funds and Mutual Funds, understanding how they work, types of commingled fund structures, differences between them and mutual funds, their benefits and challenges, factors to consider before investing, and the commingled fund offered by Alchemy.

Are Commingled Funds similar to Mutual Funds?

Commingled funds are similar to mutual funds but are typically opted by HNIs, UHNIs, and institutional investors rather than individual retail investors. Both are managed by professional fund managers who allocate the pooled assets across various investments according to the fund's specific objectives.

How Commingled Funds Work

The operational mechanics of commingled funds involve several key steps:

1. Pooling of Assets:

Investors contribute their capital to the commingled fund, which is then collectively invested in a range of assets according to the fund's strategy.

2. Professional Management:

The fund manager is responsible for allocating assets, managing the portfolio, and making strategic investment decisions aimed at achieving the fund's objectives.

3. Returns Distribution:

Returns and other gains from the fund's investments are distributed proportionally among investors based on their share of the fund’s total assets.

This process allows investors to benefit from the expertise of professional managers and the advantages of a diversified investment portfolio.

Different Types of Commingled Fund Structures

There are several types of commingled fund structures. Here are some of the most common:

1. Exchange-Traded Funds (ETFs):

An ETF is a commingled fund traded on an exchange, like a stock. ETFs often track an index, such as the S&P 500, or a sector, such as healthcare.

2. Hedge Funds:

A hedge fund is a commingled fund that uses aggressive strategies to generate higher returns. Hedge funds are typically only available to accredited investors.

3. Private Equity:

Private equity is a commingled fund that invests in non-publicly traded companies.

So, what is the difference between Commingled Funds and Mutual Funds?

1. Types of Investments:

Both commingled funds and mutual funds invest in a variety of securities such as stocks, bonds, and money market instruments. However, commingled funds may also invest in a wider range of assets including real estate, private equity, hedge funds, commodities, and other alternative investments.

2. Regulation:

Commingled funds are not regulated by the same laws as mutual funds, giving fund managers more flexibility but also introducing more risk. Commingled funds are subject to regulatory oversight. Domestically, they are governed by SEBI, while in GIFT, the IFSCA is responsible for their regulation. Although commingled funds are unsupervised, they are subject to review by the comptroller of the currency and the respective state regulators. Globally, all funds are regulated. Mutual funds, on the other hand, are regulated and supervised by the Securities and Exchange Board of India (SEBI). SEBI's mandate encompasses overseeing mutual fund operations, from formation to administration, setting a framework to protect investor interests, and ensuring market integrity.

3. Transparency:

Commingled funds are not required to disclose their holdings or provide regular reports to investors, unlike mutual funds. This lack of transparency can be a downside for some investors but allows managers to capitalize on opportunities that may not be available to mutual fund managers. However, it is important to note that certain commingled funds, such as Alternative Investment Funds (AIFs), are required to share portfolio details at a frequency defined under their respective regulations.

4. Investment Flexibility:

Commingled fund managers have more freedom in their investment decisions, potentially leading to higher returns compared to Mutual Funds.

Advantages of Commingled Funds

Commingled funds offer several advantages:

1. Higher Returns:

Due to the flexibility in investment strategies, commingled funds have the potential for higher returns compared to traditional investments like mutual funds.

2. Diversification

By pooling resources, investors can achieve greater diversification, reducing risk across a broader portfolio of securities.

3. Cost Efficiency

Lower administrative and management costs make commingled funds a cost-effective investment option compared to separately managed account(SMA) (a bespoke portfolio of individual securities managed on behalf of an investor by a professional investment firm).

4. Tax Advantages:

Commingled fund managers can take advantage of opportunities to defer or minimize taxes on behalf of investors.

Challenges of Commingled Funds

Despite their benefits, commingled funds also come with certain challenges:

1.Higher Fees:

Commingled funds can be more expensive than traditional investments like Mutual Funds or ETFs due to higher management fees.

2.Illiquidity:

These funds can be illiquid, making it difficult to sell your investment if you need to access your money.

3.Risk:

The lack of regulation and transparency means that commingled funds can involve more risk.

Factors to Consider Before Investing

When considering investing in commingled funds, it is essential to evaluate several factors:

1. Investment Goals:

Ensure the fund’s objectives align with your own investment strategy and financial goals.

2. Risk Tolerance:

  Assess the fund's risk profile to ensure it matches your risk tolerance.

3. Manager’s Track Record:

Review the experience and performance history of the fund manager.

4.Costs:

Understand all fees and costs associated with the fund to gauge its true profitability potential.

5. Liquidity Needs:

Consider your liquidity needs concerning the fund’s withdrawal terms.

Commingled Funds: The Alchemy Approach

Alchemy India Long Term Fund (Fund) is one of the Schemes of Alchemy Alternative Investment Trust, registered with IFSCA as Alternative Investment Fund, vide registration number IFSC/AIF2/2022-23/0039/01. Originally incorporated in June 2008 in Mauritius, the Fund (managed by Alchemy Investment Management Pte Ltd, Singapore) was migrated (along with investments and investors) in April 2023 to GIFT City in India (managed by Alchemy Investment Management LLP).

The US dollar denominated Fund is open for subscription to global investors including Non-resident Indians (NRIs) and OCI certificate holders, who would look for actively managed exposure to the Indian equity market.

Kindly write to us at connect@alchemyim.com to know more about our commingled fund, Alchemy India Long Term Fund.

This blog is for informational purposes only and should not be considered as an offer or solicitation to buy or sell any securities or make any investments. We recommend readers to take independent advice before taking any investment decisions. Please refer to our Disclaimer and Disclosures for more details.