Unit trusts invest a wide variety of different investment sectors, also called ‘asset classes’.
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Share funds invest in the Australian and/or international share markets. They’re volatile; the value of your investment will rise and fall with the price of the shares the fund invests in.
Australian share funds tend to specialise by company type, investment style (value or growth, for example) and by investment purpose (such as ethical funds).
International share funds may specialise geographically, for example, in emerging markets or Asia and/or by sector and industry such as global healthcare or global technology. They are more volatile than Australian shares.
A special type of share funds are index funds. Their investment returns reflect (before fees) the returns of particular benchmark indices, such as the Australian shares S&P/ASX 200 index.
Property funds can be volatile. Some borrow money to invest, making them more risky.
Listed Property Trusts (LPTs) often invest in one property type like shopping centres or hotels. They’re listed on the stock market so you need to use a broker to invest.
Diversified property funds usually invest in a number of listed and/or unlisted property trusts, sometimes adding direct property investments.
Alternative assets: hedge funds
Hedge funds (or absolute return funds) aim to preserve capital and produce positive investment returns in both rising and falling investment climates.
- They use a broad range of strategies and may borrow to invest, which makes them high-risk. On top of normal management fees, absolute return funds typically have performance-based fees between 15 and 20% of returns over a particular benchmark.
- Hedge funds may produce above-average returns in a falling market but they may under-perform in a rising equity market.
Fixed-interest funds invest in bonds issued by governments or companies to borrow money from investors for a fixed term and interest rate. Bonds can be traded; they lose value when interest rates go up, as this means newly issued bonds offer higher returns.
Mortgage funds lend money to companies and individuals, and may be secured by the property bought or built. They may lose money if the borrower defaults. Some funds reduce risk by lending money to a mix of borrowers. There are two types of mortgage funds: high-yield and traditional funds.
Cash funds or cash management trusts
These invest in the money market and sometimes work like a savings account, with a cheque book and ATM access.
- Instead of a fund that invests in one market sector you can dip into a number of sectors using multi-sector funds (also called balanced funds).
Not all balanced funds are the same; common categories are multi-sector 20, 40, 60, 80 and 100. The number represents the percentage of funds invested in growth investments like shares and property (with the remainder invested in defensive investments like cash or fixed interest).
Conservative investors would be more interested in multi-sector 20 or 40, while more aggressive investors might look at multi-sector 80 or 100.
This article looks at individual funds available to personal investors. You can also use wraps and master trusts, which give you access to managed funds for ‘wholesale’ fees but they may only have a limited selection of funds and extra layers of fees. For more about them see our report.