There is often confusion in the market when people think of funds. By definition, a fund is a pool of investors’ money that is managed on their behalf by a fund manager. By the way of the initial prospectus document, a fund should be operating or trading to a specific strategy, as outlined in documentation and works to generate profits for the members of the fund.
Many people wouldn’t know, but if they have a superannuation account, they are members of a managed fund.
A managed fund is a fund in which your funds are pooled together with a range of other investors capital and an investment manager then buys and sells the shares or other assets on your behalf. Managed funds are a form of passive investment, as the managers are responsibility and have the autonomy of the investment decisions. In addition, managed funds tend to pay out in a periodic manner.
Unlike managed funds, exchange traded funds or ETF’s are a managed fund that can be bought or sold on a secondary market – in Australia they are designed to track an index of shares or other financial instruments.
Both funds offer diversification for investors as well as scalability as the positions that both exchange traded funds and managed funds can take being a ‘pooled investment’, as such this style of investing can spread the investment much further than the reach of the individual.
Both exchange traded funds and managed funds are ‘pooled’ investments, so you as an investor to get little to no autonomy on the investment decisions in particular stocks or other asset classes.
Managed funds are more complicated. Where exchange traded funds track a pre-determined index – such as the ASX200 – managed funds are typically working to a predefined investment strategy but have flexibility on where and in what assets they invest in, leading to a very complex makeup.
Mutual funds are actively managed whereas exchange traded funds are ‘passively managed’ investment options, meaning that the fund managers are actively trying to move money around to make additional profits, where the exchange traded fund has the objective to ‘track’ the index, not outperform it.
Finally, exchange traded funds are able to be bought and sold on the ASX markets through your online share broking platform. Meaning there are no ‘income or minimum asset’ requirements, no minimum buy-in and they can be liquidated as soon as the markets allow you to do so.
Managed funds are for sophisticated investors and high net worth individuals, whereas the exchange traded funds are accessible for all investors, including first-timers. Where a sophisticated investor may use the exchange traded fund to diversify the overall risk of their investment portfolio, a first-time investor may enter an exchange traded fund to start their investment portfolio.
Apart from both being ‘funds’, there are a significant number of differences to consider between a managed fund and exchange traded funds. Before investing in either, always consult your financial specialist to ensure that it is consistent with your overall personal financial plan and investing capabilities.
We welcome you to give our team a call to discuss your investment goals and objectives.
You can call Walker Capital Australia on +61 2 8076 2210, and we’ll see how we can help you achieve your investment goals.
Want to read more great information on Exchange Traded Funds? Check out our Exchange Traded Funds article: Exchange Traded Funds