There are many types of ‘funds’ that exist within Australia; however, unless you are positioned within the financial services industry, or you are a wholesale client by definition of the Corporations Act 2001, chapter 7 (for example, at the time this book was written, you had an annual salary exceeding $250,000 in two consecutive years or net assets exceeding $2.5 million) you are more than likely to not have too much knowledge around the managed funds available.
By definition, a managed fund is a type of ‘managed investment scheme’ in which your investment or money is pooled together along with others. With a fund created, the fund manager then buys and sells shares or other assets on behalf of the funds.
Every working Australian, must by law set aside money during their working life to support their retirement. This system is known as Superannuation. With your superannuation, the Australian superannuation guaranteed rate of 9.5%, which will rise to 12% by 2025 is paid into your superannuation fund by your employer. A superannuation fund is similar to a managed fund in that the funds are pooled and managed by an Investment Manager, however a superannuation fund is specifically created to ensure your financial security in retirement for those who are members of the superannuation fund.
As a holder of superannuation, you can log into your super account and see how much you have, what investment mix your portfolio is set up to achieve, what assets your money is invested in and how the performance is tracking.
There are several differences between a superannuation fund and a managed fund, some of which are:
A managed fund works slightly differently
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 unit’s value is 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 investment management philosophy to provide a defined risk/return outcome.
Investing in a managed fund is not mandatory like superannuation but it essentially operates in the same way.
Unlike with your super, as an investor in a managed fund, you are usually paid income or 'distributions' periodically. The value of your investment will rise or fall with the value of the underlying assets.
What are managed funds used for?
As with many funds and financial instruments for that matter, one of the major uses for managed funds is diversification. This is done through managed funds by spreading the risk of the investments with different types of shares or levels in different asset classes, including stocks, bonds, commodities, currencies, ETFs - you name it.
With the managed fund pooling the resources from a range of investors to realise economies of scale, it can then amplify their positions through not only adding additional investors to the pool but also taking a margin loan out against the funds in the position – should the risk tolerance of the fund allow it to.
When investing in a managed fund, you are paying a percentage and fees to expert fund managers, who are responsible for the performance of the fund, picking the financial instruments being traded and managing investors’ money in a responsible and effective way.
With access to analysts, market data, insights and research that is far beyond the time and scope available to individual investors, the decisions made within the managed funds should always be backed by research.
Another benefit of managed funds is compound returns or reinvested products and distributions being allocated back into your fund. This allows any future performance of your investment to be now based on a larger amount – thus compounding – rather than pulling the profits from the managed fund.
This form of investing in funds is what is commonly termed as ‘passive investing’. That is to say, as an investor, you are putting your money and its future performance to work through giving it to someone else to manage.
By doing this, you absolve yourself of the responsibility of the day-to-day checking, trading, research and updating, while your fund manager who has access to a wealth of time-critical data, teams of analysts and decades of market experience takes the wheel and drives your money harder.
What type of managed funds exists on the market today?
Although there are six (6) main types of managed funds on the market today, there are many more varieties of funds, providing a spectrum of assets allocated based on the risk profiles, desired outcomes and what the money is being invested to achieve.
Depending on your personal investment strategy and financial goals, you may opt to invest in one or a combination of funds to ensure your risk is spread, and you are achieving the desired outcomes.
Should you be looking to hedge your investment portfolio with a safe bet looking to invest in income funds may be the strategy to employ, meanwhile, should you be looking at the ‘long game’ in terms of investing money for 5+ years, then a growth fund or even an index fund could be an ideal avenue for investment.
While index funds – as well as active funds – also offer investors access to invest in a range of financial assets in emerging markets or specific industries, so they also offer significant short-term opportunities as well.
The key is under careful & experienced management; a managed fund offers significant advantages for almost all retail investors.
What type of fees can you expect on a managed fund?
On a managed fund, the fee structures can vary depending on the structure of the fund, the financial instruments that are being traded as well as the potential risks involved with the fund, not to mention the fund managers themselves, their background, past performance etc.
However as quoted from the Sydney Morning Herald, “based on an initial investment of $50,000, the average investment management fee paid by individual small investors for multi-sector balanced managed funds is just under 1 per cent but can be as high as 2.5 per cent. Average "retail" fees – those paid by individual investors - on multi-sector "growth" funds are 1.16 per cent and 1.18 per cent on multi-sector "aggressive" funds”.
What are the next steps when looking into a managed fund?
If you are considering a managed fund as part of your portfolio, as with all financial products, it is always important to speak to an independent expert before doing so to ensure that the funds meet with your investment strategy and particular risk tolerance.
Many fund managers have a minimum investment of between $5,000 and $250,000 for retail investors, making them out of reach for smaller investors. However, with ETFs or exchange-traded funds that are listed on the ASX, there are other options should you be looking to dip your toe in the managed fund water sooner.
Remembering that online stockbrokers – such as IG, CommSec or CMC Markets Stockbroking - typically charge anywhere between $10 and $20 brokerage for a $100 trade, which even at the low end of the brokerage scale, this means that with every $100 worth of shares you should expect to pay at least $10 in brokerage, as a rule of thumb.
Like with all investments, you need to consider your personal investment goals, your tolerance to risk and the amount you are looking to invest and for how long. These decisions will have a bearing on which fund you may end up looking to invest in, and also the managed fund provider you go to work with.
As with all financial decisions, as an investment, it is prudent to research and seek professional advice before making any finite decisions.
Managed funds are not exclusive to sophisticated investors or high net worth individuals. They offer significant advantages to investors who wish to spread their investment and risk across a range of shares of financial assets, rather just in one particular company or asset class.
Although there are many hedging and risk benefits to this approach, there are still risks involved, and these should be assessed before investing in any hedge fund.