What is an Umbrella Fund? (with photos)

A fund manager obtains ownership in several other money management companies.

In the financial world, the term “umbrella fund” has two distinct definitions. In some situations, it refers to a type of retirement fund that pays pensions to employees working in various companies. In others, it is a type of mutual fund that individuals can invest in and that contains a variety of sub-funds. Each fund has its own characteristics and management team, and the general structure of the fund allows investors to easily transfer their money between subfunds.

A retirement fund is usually created by a group of small employers who do not have enough employees to create a large pension fund on their own.

A retirement fund is usually created by a group of small employers who do not have enough employees to create a large pension fund on their own. Each company receives payments into the pension fund of its employees. The companies then pool the funds, putting them all under the control of a single pension fund manager. The manager invests the funds in a portfolio and generates a return. When employees who contributed to the fund start receiving pension payments, they are all made out of this pool of funds.

Many financial markets have minimum investment limits that make them inaccessible to smaller investors.

The advantage of companies forming an umbrella fund, rather than operating small pension funds individually, is that pooled contributions allow the pension fund manager to make investments on a larger scale. Many financial markets have minimum investment limits that can make them unaffordable for smaller investors. Even if a smaller investment pool could meet the limits of a given market, a larger investment pool can meet more of the limits simultaneously, allowing the pension fund manager to diversify the portfolio further. The greater flexibility of larger mutual funds can help the manager create higher returns.

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A mutual fund managed as an umbrella fund, also called a fund of funds, is made up of several smaller funds, called sub-funds. They may be focused on different markets or have different investment strategies. Generally, each has a separate management team that oversees the investment of the money of that sub-fund. Investors in the umbrella fund choose how to distribute their shares among the different subfunds.

An investor may choose to invest in an umbrella-type mutual fund if they want greater flexibility in their investments with minimal transaction cost. It may instruct the fund to move its shares from one sub-fund to another, rather than selling its shares in one fund and buying shares in another. This is convenient for the investor, who can change their investment strategy while remaining with a fund manager they are familiar with. The downside to this approach is that it can encourage investors to place a very large percentage of their investment portfolio under the control of one entity.

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