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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.[1]
Investing in a managed fund, is not mandatory like superannuation but it essentially operates in the same way – it’s just most Australian’s don’t know much about their super!
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.[2]
[1] https://www3.colonialfirststate.com.au/personal/guidance/fundamentals/how-do-managed-funds-work.html
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 to 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.
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”[1].
To ensure that the finds meet with your investment strategy and particular risk tolerance. With financial products, there are risks of losses, and should your fund manager take a leveraged position, your losses could exceed your initial investment.
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 ETF’s 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 ANZ Share Trading - typically charge anywhere between $10 and $20 for a $100 trade, which even at the low end means that for each $100 trade you’d actually only be getting $90 worth of stock[1].
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, unlike many other funds, are not all exclusive to simply 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.
[1] https://www.canstar.com.au/investor-hub/start-investing-with-nothing/
