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Commingled Funds vs. Mutual Funds: Where to Invest for Retirement?

While many beginner investors have heard of mutual funds or ETFs, commingled funds can be a bit more confusing to a novice. Investopedia defines the term as "A fund consisting of assets from several accounts that are blended together. Investors in commingled fund investments benefit from economies of scale, which allow for lower trading costs per dollar of investment, diversification and professional money management. "

From a broader perspective, commingled funds pool assets from various accounts and invest in a basket of financial instruments including mutual funds. However, unlike mutual funds, these are not for retail investors. Commingled funds, being pooled funds or common funds, attract money from several accounts, and they can mix the capital from qualified employee benefit plans.

Let's look in detail into the difference and similarities of commingled funds and mutual funds.

Major Similarities & Differences

The most important similarities between commingled funds and mutual funds include the following points:

1. Both hold financial instruments such as stocks, bonds or both.

2. Both of them are professionally managed by fund managers.

The most important difference between the two is that a retail investor cannot invest directly into a commingled fund. These are primarily for retirement plans, where assets of qualified employees are pooled into a single fund.

The other major difference between them is that mutual funds are regulated and have extensive disclosure requirements. Mutual funds must be registered with the U.S. Securities and Exchange Commission, and are subject to Investment Company Act of 1940.

Commingled funds, on the other hand, are not regulated by the SEC, thus giving them the leeway of not submitting extensive disclosures. The U.S. Office of the Comptroller of the Currency and state regulators, however, oversee these funds.

Advantages & Disadvantages

Since commingled funds are not regulated, this leads to lower legal charges and operating fees. Unlike mutual funds, and their prospectus document does not offer investors key information related to their commingled funds. In addition, commingled funds are not publicly traded, so they do not have tickers to allow investors to easily track their financial performance. A mutual fund prospectus, on the other hand, provides detailed information such as trading history, a fund's fees, and investment strategies.

Retirement Plan

On that note, a 401(k) investor must carefully read the Summary Plan Description, a document that a commingled fund will offer to investors.

This also brings us to the 401(k) plan, which offers investment in mutual funds to individual investors in a tax-advantaged way. A 401(k) plan is a retirement saving plan, much like a pension plan. Named for a section in the tax code, 401(k) plan allows employees to invest a percentage of their salary into accounts intended for retirement savings.

The percentage from the salary is deducted before taxes, and no tax is paid until the invested capital is taken out. Employers too may contribute in each employee's plan. In fact, employers often match the percentage of investment by the employees up to a certain percentage. (Read: How to Maximize Your 401(k) )

Picking Funds for Similar Strategy

As mentioned above, individual investors cannot invest directly into commingled funds, which are generally used for retirement. However, what retail investors can opt for is investing in mutual funds that offer an Individual Retirement Account (IRA). An IRA is a government regulated individual retirement plan for retirement savings with tax advantage. (Read: What Can IRAs Offer to Mutual Fund Investors? )

Apart from offering IRAs and positive gains over the last three and five years, the funds below carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy) , as we expect the funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund as well.

Fidelity Select Health Care PortfolioFSPHX invests the majority of its assets in companies whose principal operations include production, design and sales of health care related products or services. The fund focuses on acquiring common stocks and invests in companies all over the globe.

FSPHX boasts three- and five-year annualized returns of 21.28% and 18.5%, respectively. The fund has an annual expense ratio of 0.72% as compared to category average of 1.35%. FSPHX carries no sales load. The minimum initial IRA for this fund is $200.

T. Rowe Price Global Technology PRGTX invests a large portion of its assets throughout the world in the common stocks of companies that generate a majority of their revenues from the development, advancement, and use of technology. The fund invests in a minimum of 5 countries and a minimum of 25% of its assets is invested in foreign companies. It invests in firms with established track records.

PRGTX boasts three- and five-year annualized returns of 21.43% and 14.40%, respectively. The fund has an annual expense ratio of 0.91% as compared to category average of 1.45%. PRGTX carries no sales load. The minimum initial IRA for this fund is $1000.

Vanguard Healthcare Index Admiral VHCIX invests in almost all or all of the stocks which are included in the MSCI US Investable Market Index (IMI)/Health Care 25/50 index. VHCIX seeks to provide returns identical to that of the index. The index includes domestic health care companies and is non-diversified.

VHCIX boasts three- and five-year annualized returns of 16.70% and 16.93%, respectively. The fund has an annual expense ratio of 0.10% in comparison to the category average of 1.35%. VHCIX carries no sales load, and has no minimum initial IRA investment.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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