Managed funds are one of the best ways to get started with investing.
With these funds your money is pooled with other investors and managed by a financial expert, meaning you get instant diversification without having a lot of experience in investing.
However, there are several types of managed funds available and choosing the right one is no easy feat.
To help you out, we compiled a comprehensive guide that will teach you everything you need to know about Australian managed funds and how to invest in one.
What is a Managed Fund?
A managed fund is an investment trust that pools your money together with different investors into a single fund. The fund is managed by a professional fund manager who purchases and releases assets on the behalf of the investor.
You can invest in actively-managed funds, where the fund manager chooses shares and stocks based on their own judgement, or you could go for a passively managed fund. In this case, the aim is not to beat the market but mimic it.
Index funds are a type of passively-managed fund, tracking the performance of a financial index.
For more on what index funds are and how you can invest in them, here is an informative guide.
How do Australian managed funds work?
Managed funds allow you to enter the market without investing directly in a product. Instead, you hold units in the fund. For instance, an investment of $2,000 at a unit price of $1 gets you 2,000 units.
Each unit represents an equal portion of the value of the fund. So, the value of the units in the managed fund will go up and down according to the value of the underlying assets held in the fund.
You earn income when the unit price increases (capital growth) or the fund manager could pay out income from dividends or interest. This income, referred to as distributions, can be paid out according to a set schedule or you could use it to invest it back into the fund, letting you own additional units without putting more money in.
What Types of Managed Funds are There?
Managed funds differ mainly in the types of asset classes you can invest in.
The combined capital in a managed fund is often applied across a wide range of assets, from shares, bonds and property.
Choosing the right type of managed fund to invest in is the most important decision as any potential income you might make from your investment depends on the value of the assets held within the fund.
Managed funds in Australia typically fall into five main categories:
- Australian shares (Australian equities)
- International shares
- Fixed interest (usually bonds)
Here is a closer look at each of them:
Cash management trusts
These funds are mainly invested in short-term securities, like short-term government bonds, short-term deposits and bank bills. They are usually low risk and overall maturity should be less than 12 months.
Investing in managed fixed interest funds involves investing in the same things as Cash funds, like bank deposits and bank bills, as well as government bonds or corporate debt and mortgage-backed securities.
Fixed income Managed Funds could provide a more reliable income since there is less fluctuation than investing in other asset classes like shares. If you invest in a Fixed income Managed Fund, your income (if you generate any) will be paid out every quarter.
With these funds, you can invest in any Australian company listed on the ASX (with the exception of property companies). There are several Australian Shares Managed funds to choose from, including Australian sector Managed Funds that provide exposure to certain industries or an Australian Shares – Large Cap fund that shows preferences to companies with bigger capitalisation stocks.
The income earned from these managed funds, along with franking credits for eligible investors, is paid out every six months.
If you want to gain exposure to internal stock markets like the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE), International Managed Funds could be the right investment vehicle.
With these funds, you can invest in companies that trade on international stock exchanges so you can diversify both into overseas markets and across several companies that trade in those markets. So, for instance, you could choose to access a specific sector that is underrepresented in the ASX.
Note that by investing in International managed funds, you might be liable for higher tax payments.
Here you can invest in residential and commercial property (shopping centres, office buildings) and even in property developments, like new constructions. Unlike investing in shares, these managed funds do not have a fixed return or interest rate and you cannot withdraw money on short notice.
To find out the latest development in the real estate market, take a look at the interesting housing statistics compiled in this article.
Balanced Managed Funds
Certain managed funds in Australia combine several asset classes into a Balanced Fund.
Balanced Managed Funds aim to give investors a combination of capital growth and/or income over a longer period of time. These funds also reduce risk and could provide higher returns as investments are spread across several asset classes.
There are several options available within these funds, such as funds that have 21% to 40% of investments exposed to growth sectors (like shares and property) to ones with 80% of investments put into volatile growth sectors.
What are the differences between ETFs and managed funds in Australia?
An exchange-traded fund is a type of investment fund that you can buy or sell on the stock exchange.
ETFs and managed funds are trusts, meaning that the trustee owns the underlying assets in the fund on behalf of the unit holders.
For more information on setting up trust funds and using them to provide for your loved ones, read through this article.
On top of that, both ETFs and managed funds let you invest across a variety of assets and are open-ended so you can always purchase more units in the fund. Finally, both ETFs and managed funds can be managed passively and actively, depending on your investment strategy.
The key difference is that ETFs are traded as shares so they are sold and bought at live prices during trading. Managed funds, however, are priced at the end-of-day price or at the net asset value of the assets.
Transparency is another difference. While fund managers are not obligated to share all of their investment information, EFTs are completely transparent. Namely, EFT managers regularly update their underlying holdings information on websites, while managed funds only disclose their top 10 investments and even this is optional.
Why Are Managed Funds Popular in Australia?
What are the benefits of investing in managed funds?
1. No effort
For one, managed funds take the hard work out of investing. Unlike investing in individual stocks and shares, you can leave the buying and selling decisions to the fund manager.
At the same time, you are taking away the stress out of following market movements every day, making passively-managed funds a great source of residual, or passive income. This also means that you don’t need in-depth investment knowledge, one of the reasons why managed funds are a great choice for newbies to investing.
Another thing is that managed investment funds in Australia can help you spread your money across more assets and give you access to global industries and companies that might otherwise be unavailable to you. Plus, you get exposure to all the stocks in the underlying fund and you pay the brokerage fee only once.
Spreading your investment also significantly reduces risk—if one or two investments don’t perform well, you are covered by your investment in other assets. To get this kind of level of diversification with individual shares is not only costly but time-consuming as well. Even if you go for a popular stock option, you would need a lot of money to invest in a wide range of assets and you will be charged brokerage fees on each transaction.
3. Low investment requirements
Australian managed funds have low minimum requirements on how much you need to invest. Most managed funds require an initial investment of a few thousand dollars or less.
You could also invest through a regular investment plan or ‘regular savings plan’ so you could add extra money to the fund at regular intervals.
4. More income opportunities
Finally, managed funds can provide earnings both through price growth (as the price of units changes in value) and through distributions, giving you more chances to cash in on your investment.
What are the disadvantages of managed investment funds in Australia?
One of the biggest downsides to managed funds are the ongoing annual fees.
These can range from the establishment fee (between 0% and 5% on the initial amount you invest) to the adviser service fee that can go from 1 to 2% a year and is paid to the fund’s manager.
You could also be required to pay a contribution fee on each amount you contribute to the fund, as well as fees for transactions, management and withdrawals. Finally, there is a performance fee attached that is paid if your investment does better than the target return.
Fees could significantly reduce the income you might earn from your investment, especially since they are paid annually even in years when your investment is not performing as well.
As with any investment, there are several risks involved when investing in Australian managed funds. Some of these are:
- Units could go down in value
- Tax and regulation could affect the value of assets in which the managed fund has invested
- Certain managed funds may also carry additional risks, like funds using derivatives.
The best way to deal with these risks is to talk to an independent financial advisor who will explain all you need to know and help you make an informed decision.
3. Withdrawing money from a managed fund
Managed funds can have fees or limitations when it comes to taking money out of the fund.
Most funds do not let you take out money within a year after the investment. Others might freeze withdrawals to protect the other people who have invested in that fund.
Another issue with withdrawing from management funds in Australia is that assets have to be sold to pay out investors. If unitholders are in a rush to cash out, then assets could be sold at a lower price and in some cases, the fund manager will have to sell the most liquid investments.
How to Choose the Right Type of Managed Fund?
Here are a few things to consider before investing in managed funds.
Read the PDS (product disclosure statement)
The PDS contains all the info you need about the fund, including which assets it invests in, fees, risks involved, how to file a complaint and most importantly, what is the estimated return.
Consider long-term returns
Take a look at how the fund has performed in the last five or six years to get a good idea of your potential returns. Just because a fund has done well in the last year, doesn’t mean that it will do so the following year as well.
What about taxes?
The distributions you receive from Australian managed funds are part of your taxable income just like any other income. Keep in mind though that some asset classes like shares come with certain tax concessions through franking credits or dividend imputation.
You could also be required to pay capital gains tax on your investment when an asset is sold at a profit.
It’s best to talk to your financial advisor about ways you could save on tax in Australia.
Regularly contact your fund manager
Legally, the fund manager has to update you on the fund’s performance every year (at least once). Make sure you get the most important information during these updates to keep track of how your investment is doing.
Carefully consider risks
As mentioned above, managed investment funds in Australia, like any investment, come with risks attached. Review these before investing so you can see if they meet your risk appetite.
If you are up for taking risks, you might want to consider investing in NFTs and crypto.
Australian managed funds can be a great first option to start investing, as they don’t require a lot of knowledge or effort. That being said, you still have to be cautious when putting money in assets.
We hope this guide has helped you figure out which types of managed funds work best for you, and we wish you the best of luck on your investment journey.
1. What is my investment timeframe?
If security is your main priority, it’s best to stick with the short investment timeframe, while the long-term timeframe is more suited for people who care about investment growth. If you find yourself somewhere in the middle, medium-term investment rates are most likely the right choice for you.
2. How safe are managed funds?
Although managed funds give many great options for those on the cautious side, they don’t guarantee that you won’t lose any money. This is why research on types of managed funds, capitalization tiers, and timeframes is the key element to making smart decisions in the investment world.
Investing in anything can be a tricky move, but with proper knowledge, you can maximise your chances of keeping your wallet full.