A Simple Guide to Investing in Managed Funds
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A Simple Guide to Investing in Managed Funds

Katie Douglass

Katie Douglass

26/03/2021 • 7 minute read

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What are managed funds?

A managed fund, also known as ‘managed investments’ or ‘managed trusts’, is a type of investment where your money is pooled together with other investors by a fund manager. The fund manager holds the money on your behalf and they can use it to buy or sell assets, such as shares or bonds. Managed funds can either be listed or unlisted funds. Listed funds are traded on the share market and are valued according to supply and demand. Unlisted funds are bought and sold directly through the fund manager and valued weekly.

In this guide, we’ll run you through the basics of managed funds and what you may need to consider.

What are the benefits of investing in a managed fund?

If you’re looking to grow your money, investing in a managed fund could be a good idea. However, as with most investments, where there may be perks there can be risks. Here are a few key benefits to investing in a managed fund:

1. A diverse portfolio

Investing in a managed fund can allow you to create a diverse portfolio. You can invest in multiple asset classes or within an asset class across different companies, industries, and countries. This kind of investment strategy also allows you to lower your risk as your investments are more spread out.

2. It’s cost-effective

Managed funds could also be a cost-effective way to invest if you have a limited amount of money. Some managed funds only require a minimum of $1,000 to $5,000 to get started. However, sometimes these managed funds only offer a lower initial investment amount if you make additional contributions (usually on a monthly basis).

3. It’s less hassle

One of the benefits of managed funds is that it can be a low-stress way to take care of your future needs. This is because managed funds are generally taken care of by a qualified fund manager who makes investments decisions on your behalf. This can save you the time and stress of having to make every decision yourself. Yet, it’s important to note that this may come with additional fees.

How to compare managed funds?

There are more than 12,000 managed funds on the market so deciding the right one for you can be an overwhelming process! If you’re not sure where to start, here are a few key factors you might consider when comparing your options:

1. Risk

First off, find out what your risk profile is before comparing managed funds. According to Moneysmart, it is recommended you find a managed fund that not only suits your risk tolerance level but also your time frame on returns. Generally, there are four risk profiles:

Conservative A low-risk investor who is willing to accept lower returns in exchange for a higher amount of stability and minimal risks.
Balanced A medium-risk investor who is willing to accept a small amount of risk for higher returns over the long-term.
Growth A high-risk investor who is willing to accept a considerable amount of risk, including short-term fluctuations, in exchange for higher long-term returns.
High growth/aggressive A high-risk investor who is willing to accept quite a large amount of risk, including significant fluctuations, to maximise long-term returns.

2. Type of managed fund

The next step is to consider the type of managed fund you want to invest in. This can help you narrow down the multitude of managed fund options available to you.

  • Actively managed funds: this type is run by a fund manager who buys and sells securities. Usually, this is based on the fund’s investment strategy and with the aim of exceeding the relevant benchmark index.
  • Passively managed funds (or ‘index funds’): this type of fund follows a market index, such as the S&P/ASX 200.
  • Ethical investment funds: this type usually consists of assets that align with the investor’s moral compass. For example, this type may avoid companies that invest in tobacco, weapons, or gambling, and instead, look towards those who invest in green energy or healthcare. It can come in both actively managed and passively managed forms.
  • Bear funds: this type is more suitable for investors looking for higher returns despite a falling market. A number of these funds might be actively managed or designed to follow an index

3. Asset class

Another factor you may want to consider when choosing a managed fund is the asset class it is investing in. Some managed funds may invest in a single-asset class or multiple-asset class. Both single and multi-asset class funds have differing levels of risk and return so it’s key to find the one that aligns with your risk profile. We’ve listed some of the common investment asset classes and what they each mean.

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Remember

Bear in mind that there can be different combinations of investment asset classes!
Shares (‘equities’): Includes investment in listed companies on the Australian or global stock market. Shares could offer higher returns but can be risky.
Cash securities (‘cash management trusts’): Includes bank deposits, bills of exchange, and promissory notes. These trusts are usually low-risk with minimal capital gains.
Property trusts: Includes residential properties, industrial, retail, or commercial real estate.
Fixed interest investments: Includes bonds.
Agricultural or agribusiness schemes: Includes investment in farming, livestock, and forestry. This may be a long-term option but could be risky as investments may be impacted by natural disasters and unpredictable weather.
Film schemes: Investment in movies.
Timeshare schemes: Investment in shared ownership of a property.
Mortgage schemes: A pool of money used to lend money to borrowers.

4. Fees and costs

Check the different fees and costs of each managed fund as they may take quite a bit out of your returns. Here are some fees and costs that may be included:

  • Buy/sell spread: every time you buy or sell units, you may be charged a transaction fee.
  • Management expense ratio (MER): this refers to the costs of managing and operating the fund. Investors are usually charged through the fund’s management expense ratio (MER), which could be between 0.5% and 2.5% of the amount invested per year.
  • Performance fee: a fee charged by the managed fund on investment profits made through the fund.
  • Administration fee: some funds list an administration fee, separate from management fee, which is an additional ongoing fee.
  • Termination fee: this refers to the fee for closing your account, over and above the sell spread. If you sell your investment units and leave the managed investment pool, you may be charged a fee.

5. Withdrawal process

To withdraw money from investment funds, you might need to make a withdrawal request. This is why it’s important to understand the process for this before you choose your fund. Sometimes, a fund can be ‘frozen’ if there are a large number of withdrawal requests by investors at the same time. This may be because the fund doesn’t have large amounts of cash available, as it might be in assets such as property and shares.

A significant economic downturn, such as the Global Financial Crisis (GFC), is an example of when this could occur. Alternatively, some funds offer a few options for an investor to get their money back including withdrawal offers, hardship relief, and rolling withdrawal offers.

6. Long-term performance

While past performance shouldn’t be solely relied on as an indicator of future returns, it might be worth a look at. As investment is about growth, it’s a good idea to look into the fund’s past performance and whether it has met investment objectives in the past.

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Hot tip!

Check the Product Disclosure Statement (PDS) before choosing a managed fund. A PDS will contain all the information you need to know about a fund including:

  • What assets the funds invests in
  • The fees
  • The risks
  • The benchmark or target return
  • The complaints process

Features of top performing managed funds

One of the key factors in choosing a managed fund is long-term performance. While a fund may perform well in three months, it doesn’t mean that it will in the next year or three.

As a result, it’s worth looking at how the fund has performed over a five to ten year period. This can help you get a stronger sense of how it might perform in the future. It could also be a good idea to compare the returns of a managed fund against either an index fund or other similar funds. With an index fund, you can see if it’s keeping pace with the relevant market, such as the ASX 200, or you can compare the returns with other similar funds to see how it’s performing against competitors.

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Pro tip:

You can find out how well a managed fund has performed through either the:

  • Morningstar Fund Screener | https://www.morningstar.com.au/Tools/FundScreenerResults
  • Investsmart Fund Search | https://www.investsmart.com.au/

Ready to grow your wealth and start investing? We hope this article on managed funds gave you some key insights for your investing journey. If you would like more information on investments, check out our other helpful articles on Oiyo.

Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.


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Katie Douglass

Written by Katie Douglass

Katie Douglass is the Communications Manager at Oiyo and a writer. In recent years, Katie's work has appeared in publications such as Marie Claire, InStyle, and THE ICONIC. She has a Bachelor of Creative Industries in Fashion Communication & Journalism from the Queensland University of Technology. At Oiyo, Katie is responsible for overseeing editorial strategy.

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