An introduction to managed funds

Managed funds may give you access to a broader range of investment types by pooling your money together with other investors. Find out how they work and if they’re for you.

If you want to diversify your investment portfolio and spread potential risk within and across different asset classes, sectors and geographic markets, you may find you’re limited by the amount of money you have available to invest.

By pooling your money together with a group of investors through something like a managed fund however, you may be able to tap into broader investment opportunities (such as infrastructure or overseas markets). This could help you to diversify your portfolio and thus reduce investment risk, while giving you access to professional fund managers who can make the buy and sell decisions for you.

What is a managed fund?

A managed fund pools multiple investors’ money into a fund, which is professionally managed by specialist investment managers.

You can buy into the fund by purchasing units, or shares. The value of each unit is usually calculated daily, and changes as the market value of the assets in the fund rises and falls.

Each managed fund has a specific investment objective, typically focused on different asset classes and a specific strategy to achieve that objective.

For example, the investment objective of a fixed interest managed fund may be to provide income returns that exceed the return available from other cash investments over the medium term. The strategy to achieve that objective might be to invest in a combination of Australian and international government bonds.

Why invest in a managed fund?

There are three key advantages a managed fund may bring to your investment portfolio:

  1. Diversification to reduce risk

By investing across different assets classes (and within different types of securities within asset classes), you can potentially reduce the risk of all your investments dropping in value at the same time. You can also balance different investment timeframes and income returns.

For example, investing $1,000 in a managed fund could give you exposure to 50 different company shares in an Australian equities managed fund. Investing that amount in 50 companies as an individual on the other hand, would generally limit you to companies with low share prices (and cost a significant amount in brokerage fees).

  1. Expert fund managers

Selecting individual securities is time consuming and requires a lot of market knowledge.

Professional fund managers have access to large amounts of information and research and have the processes, platforms and skills in place to manage your money more effectively.

  1. Reinvesting may bring compound return benefits

You can invest regular amounts into a managed fund, just like a savings account. Also, by reinvesting your fund’s distributions you could ‘compound’ your investment returns.

Effectively, any future interest payments will be a percentage of a growing amount. (‘Distributions’ are payments to investors of the investment income that a fund generates. This may include interest income, dividends, rent and capital gains from selling assets that have risen in value.)

Types of managed funds

When you’re comparing managed funds, look at the asset allocation to understand its risk profile and potential performance.

Income funds: Low risk of capital loss, focus on defensive, income generating investments such as cash and fixed interest.

Growth funds: Longer term (five plus years) investments, focused on capital growth rather than income and weighted towards securities and equities.

Singe sector funds: Specialise in just one asset class, and sometimes a sector within that class (such as Australian small companies).

Multi-sector funds: Diversified across a range of asset classes, with varied risk levels.

Index funds: Aim to achieve returns in line with a market index, such as the Australian All Ordinaries index by closely replicating the components of the particular index (also known as passive funds). These are usually low cost because the manager is simply mirroring an index rather than making their own investment decisions. (A market index or benchmark is a hypothetical portfolio of securities that represents a segment of the market.)

Active funds: An actively managed fund is one where the manager chooses investments with the aim of delivering a performance that beats the fund’s stated benchmark or index. Together with a team of analysts and researchers, the manager will ‘actively’ buy, hold and sell stocks to try to achieve this goal.

There are also multi-manager funds, which invest in a selection of other managed funds to spread your investments across different fund managers.

How do I choose a good fund manager?

Most fund managers have a particular ‘investment style’, so it’s important to feel comfortable with the approach of the fund manager you’re choosing.

This includes the processes that determine how they select companies or assets to invest in. Typically, they will be more inclined towards growth (seeking earnings growth potential), value (looking for share prices that may be undervalued) or ‘neutral’ (or ‘core’, a combination of growth and value).

How much will a managed fund cost?

Fund managers charge fees in different ways, so it’s important to read the Product Disclosure Statement before you make a final decision.

Usually, there are management costs and service fees that are charged as a percentage of the assets of the fund. The level of fees will vary depending on factors such as the type of assets being managed and whether it is active or passive.

Also, when you buy or sell units in a fund, brokerage and stamp duty costs may be covered by the spread (the difference between the buying and selling price).

Who should I talk to about managed funds?

A financial adviser can help you decide which managed fund may be right for your investment goals and risk profile and answer any questions you have about your investment options.

Source: CFS

Crest Financial Advice