Which best describes a local government investment pool (LGIP)?

A local government investment pool (LGIP) functions similarly to a mutual fund in that it allows multiple local government entities to pool their funds together for investment purposes. This collective investment offers participants the advantage of diversification and typically lower transaction costs compared to individual investments.

By pooling resources, LGIPs can access a wider range of investment opportunities and professional management that might not be feasible for individual governments with smaller investment amounts. This structure is designed to enhance the investment returns while maintaining liquidity and safety, which are critical for public funds.

The other options describe characteristics that do not accurately represent the broader functionality of an LGIP. For instance, LGIPs are indeed designed to allow the commingling of funds from various local entities, rather than restricting this practice. They also do not specifically segregate funds from local excise taxes or operate under a bond covenant structure. These aspects clarify why the description of an LGIP as resembling a mutual fund is the most accurate portrayal of its purpose and function.