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Financial Planning

What are managed funds?

07 September 2017

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

You’ve probably heard friends or family say they have invested in managed funds, but what are these, how do they work and are they right for you?

What is a managed fund?

A managed fund is run by a professional fund manager, who pools together money from individual investors to invest in assets.

There are many types of managed funds. Each will have a specific investment objective, usually focused on different asset classes, such as shares, bonds or property, or a mix of these. The manager may invest only in Australia, or in another country (such as Japan), region (such as Asia) or across the globe (excluding Australia).

The manager may also invest according to a special investment style and philosophy. For example, the manager may be an active manager which looks to buy shares that are undervalued or overlooked by the market after doing extensive research. Or the manager may be a passive manager who simply buys a portfolio of assets that replicates an index, such as the All Ordinaries index.

How do they work?

Most managed funds adopt a unit trust structure. That means you will buy units from the manager, each unit representing an equal portion of the fund’s value.

If the value of the fund increases, the price of each unit will rise. If the value of the fund falls, the unit price will also drop.

When you want to disinvest, you will sell your units back to the fund manager in exchange for the market value of the unit.

You can expect to get two types of returns from a managed fund. Firstly, your managed fund will pay you regular income (dividends) or distributions, based on the profit or income the fund receives from its investments. Secondly, you will enjoy a capital growth if the value of your units rise over time.

You can track how well the fund is performing by watching how much the value of your units or shares rise or fall. You should also track how your manager is performing against the benchmark that manager has set for itself.

The benefits

Managed funds make it easy to invest. by just making one purchase, you gain access to a broad range of assets or markets with a relatively small amount of cash.

By doing so, you also gain access to the investment skills, research, experience and other resources of the fund manager you select.

Managed funds also enable you to diversify your investment across different asset classes and markets, thus reducing your risks. In addition, they enable you to buy investments that might be difficult for you to access yourself – for example, shares in other countries.

And, you can make regular top up contributions to the fund or reinvest your fund’s distributions – a habit that could greatly increase your returns over the long-term.

The disadvantages

Different market conditions suit different managed funds. It’s possible your fund could underperform the market or other funds. Further to this, your fund will charge fees for the job of managing your money. Small differences in these charges can have a big effect on your returns over the long term.

When you decide to cash out your units, the managed fund may also be forced to sell assets to pay you out. If the fund invests in less liquid assets, such as property funds or infrastructure, this may take time. Fixed interest and shares are more easily switched into cash.

In addition, there could be unknown tax implications. Managed funds do not take your personal tax circumstances into account.

Where to buy managed funds?

Managed funds can be accessed directly from the fund manager, from many financial institutions or via a financial planner.

Exchange traded funds (ETFs) are a type of managed fund that can be traded on the Australian Securities Exchange (ASX). So can listed investment companies (LICs). Like managed funds, LICs also have a manager who is responsible for selecting and managing the company’s investments.

Are they right for you?

Much will depend on your personal circumstances, your level of investment knowledge and your goals.

Consider speaking to a CERTIFIED FINANCIAL PLANNER® professional to assess whether a managed fund is the best investment strategy for you and which funds would better suit your needs. Find a local CFP professional using Match My Planner today.