When you think of the ways you can invest, many people first think of buying an investment property or maybe some shares on the stock market. While these methods of direct investment have their own merits, many investors would be better served by using the investment power of a managed fund to achieve the goals of growth, security and diversity.
But how do managed funds work and why are they an effective way to invest? Here are the basics about these funds to help you make the right decision.
The concept of pooling funds
If you are simply investing by yourself you are naturally limited in how widely you can spread your investment. Your capital will only go so far and your scope is usually limited to assets that are “visible” to you. For example, you can look at what properties are available in the local real estate window or check the financial pages to see what shares can be bought on the local stock market.
Managed funds offer a fundamental difference simply through the collective power of pooling your money with other investors. With a much larger capital base, the pool of funds can be invested across a range of assets to help spread risk and to seek a wider selection of opportunities.
This collective buying power allows more diversification, so that rather than being confined to just one or a few areas you have a complete portfolio in one neat package.
Understanding types of managed funds
There are different types of managed funds to suit different investor profiles and to pursue different investment objectives. In general terms, managed funds can be divided into two categories; single sector funds and multi-sector funds.
Single-sector funds will generally focus on one type of asset class, such as cash, fixed interest (eg Government Bonds), property, Australian shares or international shares.
Multi-sector funds will spread across a range of these asset classes and will normally target a certain risk/return profile by having a weighting toward certain types of assets. The weighting will normally be indicated by a term such as “growth funds”, which invest predominantly in shares and property; “conservative funds”, which lean toward less volatile assets like fixed interest; and “balanced funds”, which are somewhere in between.
Each managed fund has a statutory requirement to publish documentation, which will detail the fund’s particular objectives and the parameters for how it invests. This allows you to choose the fund that best matches your personal requirements.
Profit from specialised skills
Another benefit of pooling your investment through a managed fund is that you gain access to the investing expertise and manpower that they possess. A fund manager will have a range of skilled personnel with skills in researching, analysing and allocating the pool of money to achieve the fund’s stated objective.
Personal investors can leverage this expertise to achieve a significant advantage in the quality of assets chosen, in contrast with having to do all the research and asset selection yourself.
Keeping a watchful eye
Monitoring and managing a portfolio of investments takes considerable time and skill. By using a managed fund you automatically have the day-to-day operational management taken care of. You can then simply look at periodical statements from the fund to see how it is performing and how it is moving its assets about to achieve its objectives.
But what about the cost?
The level of skill, buying power and convenience that managed funds offer will, of course, involve some cost to the investor. Regulation of the industry ensures that such fees and costs are declared in a fund’s promotional material so that they are transparent.
While you may think twice about whether such fees are worth it, remember that an investment that you buy into directly, (such as an investment property or company share), will still involve some form of cost – often much greater than what you would pay with a managed fund.
Buying an investment property, for example, will involve legal fees, stamp duty and inspection costs. Buying shares directly will incur brokerage costs. When you take this into account, the fees of a managed fund can represent very good value for the level of expertise and diversity they provide.
Choosing a fund to suit you
If you are interested in the benefits of a managed fund, then your financial adviser can help you assess the type of fund that suits you by making an assessment of your specific lifestyle objectives, time horizon and risk appetite. They should also have up-to-date research on managed fund performance, which can help you make informed choices on the fund or combination of managed funds that are right for you.
What do you see as the main advantage of a managed fund? Share your thoughts below.