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Guide to managed funds
Learn the benefits and risks of getting your money professionally managed by a managed fund.
Managed funds allow you to pool your money with other investors, with the fund investing in a combination of cash, shares, bonds and listed property on your behalf. In return, you will pay a small fee to the provider for the services.
There are some benefits to this type of investment, but there are also some costs and risks to consider. We'll take you through what to consider in this guide.
First, what are managed funds?
Let's start with the basics.
A managed fund is a pool of investors' capital managed professionally by a fund manager.
It gives investors the opportunity to enter a market without directly investing themselves in a product. Because of this, it takes much of the hard work out of investing.
The fund will invest in a combination of shares, cash, bonds and listed property, with you gaining the benefits in return for a small fee.
When you invest in a managed fund, you get the benefit of expert decision-making, so you don't have to worry about the day-to-day.
What types of managed funds are there?
There are thousands of managed funds to choose from because it depends on the type of assets included in the fund. These will vary depending on the risk profile of the manager.
Some may focus on a particular asset class such as property, while others may invest in a variety of assets including property, cash, shares and bonds.
No matter which type of managed fund you choose to invest in, the principle is the same.
You purchase units, which are of equal value in the fund.
Like other types of investments, the value of the units you buy can either increase or fall based on whether the value of the assets owned by the fund rises or falls.
It's also important to remember that assets owned by the fund may be sold. When assets are sold, the profits that are generated by these sales plus the previous income generated by the assets are passed on to the unit holders by way of distributions. These distributions are similar to receiving share dividends.
Investing in a managed fund
When you invest in a managed fund you will get units in the return for your capital. You will receive distributions according to the amount of money held in the fund. These are in the form of a cash payment that in some instances can be reinvested.
Let's work through an example. If you invest in one of State Street's managed funds, starting with $1,000 and each unit costs $1 Australian, you will get 1,000 units in return for your investment.
These unit prices reflect the value of the assets within the fund. So say the fund performs well, after a year the units might rise to $1.10 meaning you now have $1,100. The reverse can also happen and the unit value could fall. Again using the example of 10% the unit value could fall to 90 cents meaning your investment is now worth $900.
How to choose a managed fund
You might be tempted to look up "best managed fund" and choose the fund with the highest returns.
But, it's important to know what you need out of a financial product as well as the track record of a fund. Remember, "past performance is not a reliable indicator of future returns".
If your personal investment strategy involves capital protection, then a fast-growing fund is probably not for you. Instead, before signing up, an investor should have a planned approach when thinking of investing.
In general, here are 5 things you should consider when comparing managed funds:
- Understand your personal risk profile, investment objectives and how long you plan to invest. This is generally broken down into conservative, balanced, growth and high growth.
- Managed fund type. With numerous fund types out there, investors should decide if they want an actively managed, passively managed, ethical or even listed or unlisted fund.
- Consider the assets. Different funds obviously invest in different products. An investor should understand what assets they want to own.
- Past performance. Investors should be looking for a fund with a good long-term track record of providing for their consumers. Although it should be highlighted that 1 good year doesn't suggest a trend of outperformance.
- Fees and cost. Remember your returns are net of fees and costs.
What does it cost to invest in a managed fund?
If you invest in a managed fund, you'll have to pay a few different fees, which might sound small but will actually make a big difference to your overall performance. However, it's worth pointing out that investing in something is usually more beneficial than leaving your money in cash.
When it comes to fees, keep an eye out for administration fees, performance fees (if your fund beats its mandates) or other fees that can be involved in transacting with the fund.
Like with all these things, it is best to read the individual funds' product disclosure statement to ensure you are getting the right deal for your needs.
Managed funds vs ETFs
Managed funds are simply 1 of many types of investment funds, including superannuation funds and exchange-traded funds (ETFs). When you get down to it, they're both pretty similar – they invest your money into shares, bonds, property or cash – often a mix of all 4 and more.
Other popular investment funds available in Australia include the following:
The definitions aren't always clear cut, but most of the time, a managed fund refers to a regular investment fund that is not listed on a stock exchange (such as an ETF) and doesn't act as a superannuation account.
Because they're not listed on a stock exchange, you won't normally be able to invest in managed funds via an online share trading platform. Instead, you'll need to manually apply directly with the fund manager. However, there are some managed funds that have been registered as mFunds, meaning you can access them with select brokers.
If you've done your research and want to invest in an mFund, you can compare brokers in the table below. Make sure to select a broker with "mFunds" displayed in the markets tab.
Invest in managed funds through a share trading platform
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Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
*Brokerage fees shown are for standard share trading, see below for a list of mFund fees.
Benefits of managed funds
Managed funds can prove beneficial in a few ways:
- Diversification. Because you're pooling your money with other investors, you can invest in multiple assets and company shares without paying an arm and a leg.
- Expert assistance. Dealing with investments can be difficult and daunting. When you opt for managed funds, you have access to the advice and assistance of expert fund managers. These are the people who not only have the knowledge and expertise that can prove invaluable to investors but also the time to dedicate to managing multiple assets.
- Risk reduction. A managed fund will pool your funds into a number of assets reducing your risk. It will also be professionally managed, which could reduce the risks.
- Saving time. You won't have to dedicate huge amounts of time toward managing your investments because you have experts on hand to do all the heavy lifting for you.
- Do more with your money. Using managed funds means that you can still invest even relatively small amounts of money in a range of assets, rather than settling for a single asset due to a lack of finances.
Disadvantages of managed funds
While managed funds can provide some benefits, there are also some disadvantages:
- Below average returns. Depending on the fund you're with, you could be paying management fees for below market performance. This can be amplified if you get hit with the double whammy of both high fees and poor performance.
- Investors flock to the fads. Like with shares, there's a likelihood of chasing last year's fad or a particular fund that has outperformed. This might not be beneficial if the trend fails to outperform in the next year.
- Fees and tax concerns. Investors can find themselves paying more fees and end up with unknown tax issues.
Are managed funds suited to beginners?
Managed funds can be a great way for new investors to get into the market due to the relatively low cost and ease of access to a market.
Remember the main advantage to a managed fund is that it's professionally managed, meaning you gain access to professional knowledge and insights into markets.
Aligning a managed fund with your values
One way you can invest ethically is through managed funds.
The majority of ethical funds will use an approach known as ESG, or environmental, social and governance, which will rate companies as positive or negative depending on their performance metrics. Find out more about ESG investing here.
However, there's no universally agreed upon definition of ESG investing, meaning before you invest in any ethically-based managed fund, make sure you research the underlying holdings and screening criteria to make sure they align with your personal values.
Alternatively, if you prefer a stronger stance, you could look for a managed fund that goes beyond ESG and proactively invests in ethically-based companies while excluding others.
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