Understanding Managed Funds
Managed funds are one of the most common ways investors can invest their money. Even many large superannuation funds will use managed funds as a way to access the skills of investment managers and different types of investments.
How do managed funds work, what types are available and what are the risks involved?
Managed fund basics
When you invest in a managed fund, you’re allocated a number of units based on how much you invest and the current price of each unit. If you invest $5,000 and the unit price at the time is $1, you would own 5,000 units.
If the unit price rises to $2, the investment will be worth $10,000 ($2 x 5,000 units). And if the unit price drops to 90 cents, the investment would be worth $4,500 (90 cents x 5,000 units).
Why invest in a managed fund?
Managed funds are an effective way to make the most of your investment dollars because they are pooled with the money of other investors. This provides many benefits including:
- Asset diversification. This can help investors achieve a lower level of investment risk across their portfolio. Depending on the particular managed investment, it may invest in shares, property, fixed interest or cash, or a specific combination of these assets.
- Broader investment market access. Some markets, such as international markets, may otherwise be unavailable to you as an individual investor.
- A tailored portfolio. Your investments can be designed to suit your needs, whether you want to gain a regular income or focus on capital growth.
- Professional management of your money. A team of experienced investment managers will be in charge of your money. The fund managers are responsible for seeking out the best possible returns through careful selection of investments and by monitoring political and economic factors that may affect the performance of particular investment sectors.
- Professional investment administration. Managed funds are convenient for the investor because the manager handles the day-to-day fund administration.
Income vs growth returns
There are two types of returns for managed funds: unit price growth and distribution income.
Unit price growth occurs when the value of the underlying investments in the fund have grown over the period of the investment. This results in an increase in the price of units in the fund.
Income is paid to unit holders when a managed fund makes a distribution.
Distributions are payments received during the course of your investment. They consist of the earnings the fund has generated over the period and may include capital gains (from the sale of fund shares or other fund investments) or income (from dividends or interest).
Most managed funds will give you the option of receiving your distributions as cash to your bank account, or re-investing within the fund.
Risks of investing in managed funds
There is a simple rule about risk which generally holds true for all investments: the higher the possible return, the greater the risk of loss over the short term. However, if you plan to invest long-term, these risks can be reduced, even for more volatile investments such as shares.
For this reason, funds with a higher exposure to growth assets such as shares and property are best suited to those who are looking to invest for strong returns over longer time periods (greater than seven years) and who are prepared to experience shorter-term volatility along the way.
Funds with a higher exposure to more conservative investment types, such as Australian fixed interest, mortgages and cash, are less volatile but lead to generally lower returns.
Diversification can reduce the risk. By investing across a range of asset classes that experience good performance at different times, the high returns you receive from one type of investment can work to offset lower or negative returns from another.
Managed funds are a long-term investment
Investing in managed funds, particularly those that invest in growth assets, requires a medium to long-term investment horizon. Switching investments or redeeming the investment before this time elapses can result in you receiving less back than you originally invested.
Most importantly!
Don’t be swayed too much by past performance figures. Naturally, the fund’s track record is important but you do need to be careful. Simply because a fund has performed well in the past, does not guarantee it will do so in the future. This is where the quality of the management team and understanding how the fund invests is crucial, as different investment styles tend to perform differently across the economic cycle.
We can help you determine which managed funds will best suit you, helping to ensure you reach your investment goals.
The information provided in this article is general in nature only and does not constitute personal financial advice.
