If you don’t have the time, expertise or money to build a share portfolio by buying directly, consider buying units in a professionally managed fund. Managed funds pool investors’ money and do all the buying and selling of shares and other assets for you. Naturally, you pay fees for this fund management.
There are literally thousands of managed funds on the market, including sector-specific funds that invest in a particular asset or sector (such as Australian shares or international property) and multisector funds that spread investors’ money around a mix of asset classes (cash deposits, fixed interest, shares and property). This diversified approach spreads your risk.
The table below shows how the median Australian share fund performed over the last one, three, five and seven years (after fees) compared to the overall share market during the same period. Research house Morningstar supplied the data, which shows there was virtually no difference between the average professionally managed fund and the share market itself. The best managed funds outperformed the index, but predicting which managers will perform best is difficult.
Factors to consider
Provider Is it a well-known financial services company with a strong track record?
Excessive fees have a negative effect on your investment returns, so don’t pay too much. Annual management fees average 1.5%, which is deducted from your fund’s balance each year. Other fees can also apply, including an entry fee of up to 5% of your contributions, but much less through a discount broker. If you invest through a financial planner, fees are negotiable (as most planners keep some of what you pay as their commission).
Research where your money will be invested, including the mix of assets, sectors and companies.
Performance While past returns don’t indicate future returns, look for a fund that has performed consistently well against its peers and benchmarks over the medium and long term. Don’t just go for last year’s top fund, as it’s unlikely that short-term return will be repeated.
Amount Plenty of funds let you get started with amounts as little as $1000.
Study the managed fund’s Product Disclosure Statement. It should tell you most of what you need to know about the investment you’re entering.