Dilution of Earnings in Pooled Investments
Course: Investment Planning
Lesson 8: Pooled Investments
Student Question:
Hello,
One of the disadvantages of pooled investments is Dilution of earnings. Can you explain how? I would think that as the capital grows, the earnings will grow as well?
Thanks!
Instructor Response:
Great question,
You’re right that as total capital in a pooled investment grows, the overall dollar amount of earnings can increase. However, the concept of dilution of earnings refers to what happens per investor, not necessarily to the total pool.
When more investors join or more capital flows in, the earnings (or returns) are spread across a larger number of investors or units. If the fund manager can’t invest the additional capital at the same rate of return as before — for example, because of limited attractive opportunities — the earnings per investor (or per share/unit) can decline.
In short:
- Total earnings may grow, but
- Each investor’s proportional share of those earnings can shrink — that’s what’s meant by “dilution of earnings.”
Let me know any other questions here!
