Managed funds buying guide

Want to invest your money but not sure where to start? A managed fund might be what you’re after.
 
Learn more
 
 
 
 
  • Updated:20 Feb 2007
 

01 .Introduction

Graph

Managed funds are just that – you invest your money for a period of time (usually five to seven years), and it’s managed for you by the fund manager who runs the fund.
Based on the type of fund you choose (for example: shares, property and/or cash), the fund manager decides which assets to invest in.

Learn about managed funds

  • The different types of managed funds.
  • What type of fund is likely to suit you.
  • The different sectors in which managed funds invest.
  • Fees and charges associated with most funds.
  • What you should ask before investing your money.

How are CHOICE tests different? We buy all the products we test – we don’t accept industry freebies and we don’t take ads. We're non-profit and our work is funded by people like you.

Please note: this information was current as of February 2007 but is still a useful guide to today's market.

 
 

Sign up to our free
e-Newsletter

Receive FREE email updates of our latest tests, consumer news and CHOICE marketing promotions.

 

Managed funds pool your money with that of other investors.

  • The fund manager decides what assets to invest in and monitors ongoing performance.
  • Managed funds provide economies of scale, making investments more cost effective for small investors.
  • For example, a single Australian share fund may invest in 50 to 60 different companies.
  • A diversified portfolio can protect you from the volatility in the price of individual shares and generate higher long-term returns.

Key features

All types of managed funds have the following key features in common:

  • They’re run by a ‘single responsible entity’ — the fund manager.
  • They pull together money from many investors into a big pool that can be used to buy more assets.
  • They select investments to generate regular income, capital growth or a combination of income and growth.
  • They invest in one or more of the following: domestic and overseas share markets; commercial or residential property; mortgages; cash; or fixed-interest investments (such as government bonds and bank bills).
  • You’ll usually have to pay fees for these benefits. You might be charged an entry fee of up to 5% of your investment, ongoing fees (usually between 0.8% and 2.4% per year) and sometimes an exit fee to take money out. Find out more about fees.

Going it alone versus managed funds

Some investors prefer to pick investments themselves -- with enough research you may be able to outperform managed funds.

Even if you prefer to invest directly, consider adding managed funds to your portfolio. They allow you to spread your money over different markets (diversify).

Maximising your investment

Say you had $5000 and wanted to invest in the domestic share market. You could use a broker to buy shares in companies as a ‘direct investor’, or you could purchase units in a managed fund.

As a direct investor, you could only afford to buy a small number of shares in a small number of companies. If, on the other hand, you bought units in a domestic share trust, you could buy part-ownership in a fund that invests in 50 to 60 different Australian companies.

If you want to invest in property, $5000 obviously isn’t enough money to buy a property directly. But if you invest in a property trust, you could end up being a part-owner of shopping malls or city office blocks.

The type of fund that’s right for you mainly depends on your goals, risk profile and the timeframe you have in mind — your ‘investment strategy’. A financial adviser can help you work this out.

Funds fall into two broad groups: growth or income?

  • Cash, fixed interest and mortgage funds are mainly ‘income’ investments — their returns are more stable and foreseeable.
  • Property and shares are more volatile ‘growth’ investments with the potential for high returns if their value rises. They may also provide some income from rents or dividends (a share of the company’s profits).

Learn more about each sector and the different types of funds investing in them.

What mix of funds for me?

Your individual circumstances will dictate what asset classes are appropriate for you.

Consider your investment timeframe, goals and risk profile. ‘Investment risk’ is exposure to the chance your financial expectations won’t be achieved. Use our Investment risk quiz to work out your attitude to investment risk.

The pie charts give examples of appropriate funds for a conservative, moderate and aggressive investor.

Conservative investor


Investor pie chart

Moderate investor

Graph

Aggressive investor

Graph

Choose carefully

Choose a mix of funds and an investment approach that matches your needs in terms of risk, balance between income and growth, investment duration and tax considerations.

If you invest through a financial planner, ask them whether they have a relationship (like ownership ties or they receive special commissions/benefits) with the fund they’re recommending. You want a fund that suits you, not your adviser.

Our last study of financial advisers in 2003 found that the standard of advice is inconsistent. Almost one in five failed to meet our requirements.

MoneyUnit trusts invest a wide variety of different investment sectors, also called ‘asset classes’.

Click on the links for a detailed explanation:

 

Share funds

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

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

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

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.

Multi-sector funds

  • 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.

Master trusts

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.

Make sure you understand what fees you’ll pay before you invest — you’ll usually pay them even if the fund produces a loss, and a small difference in fees can mean thousands of dollars in the long term.

Contribution/entry fee: an upfront charge (up to 5% of your investment) also payable whenever you add money to the fund. Some funds offer Nil Entry fee options, but beware, usually higher management fees apply and you may also have to pay an exit fee.

Exit fee: percentage fee some funds charge when you leave. In many cases this will be reduced on a sliding scale and may not be applied after a certain time.

Ongoing management fee or Management Expense Ratio (MER): usually expressed as a percentage or dollar amount deducted from the fund’s assets. The Management Expense Ratio (MER), or Ongoing Fee Measure (OGFM) or Indirect Costs Ratio (ICR) are ways of calculating the ongoing management fee. There are large differences between MERs. For example the MER for actively managed international share funds ranges from 0.7% to 3%, with an average of 1.8%.

Trail: ongoing commission to the adviser or discount broker who introduced you to the fund. It’s included in the MER and usually ranges from 0.25% to 0.88%. For example up to $440 per year for a $50,000 investment.On top of the trail some financial advisers charge an adviser service fee for ongoing service.

Switching fee: may apply if you switch between investment options within a fund. If the new option has a higher contribution fee you may have to pay the difference.

Buy/sell spread: most funds charge more for units you buy than they pay for units you sell. The difference between the buy/sell price and the unit’s true value is usually 0.1% to 0.6%. The manager may have to sell and buy investments if you sell or buy units. The buy/sell spread protects other unit holders from these costs as the amount is paid directly to the fund, not to the fund manager.

Performance fee: rewards fund managers if they meet or exceed a specified performance target. The target may be based on a benchmark such as a share market index. If the fund outperforms this benchmark a percentage (usually up to 20%) of the over-performance is charged as a performance fee.

Negotiate and save

Managed fund fees can eat a big hole in your investment returns. It definitely pays to negotiate the lowest fees possible.

Decide how you want to invest in managed funds. Do you need assistance from a financial planner or are you knowledgeable enough to go it alone?

If you need advice

  • Ask your planner what fees apply and what level of service you’ll receive. Is the planner just placing your investment or will you get ongoing service? Contribution fees are usually negotiable; the planner can rebate up to 100%.
  • Ask the planner whether ongoing commissions are included in the management fee (trail) or charged separately (adviser service fee). Are there different options (dial-up/dial-down) or is it a fixed charge? Will they rebate trails if you pay a fee for their service? How does the planner’s fee compare with the cost of the ongoing commission? Take the cheaper option.
  • If you have a large amount to invest your best option might be to go to a fee-for-service financial planner who rebates the trail or places your money in wholesale funds, wraps or master trusts that don’t charge a trail.

TIP: depending on how much you invest and what service you need, paying a commission may be cheaper than fee-for-service. But make sure you know how much you’ll pay, what you’ll get for it and what your options are. Regularly review whether you’re happy with your planner’s service and advice. Change planners if you’re not satisfied.

If you don't need advice

Use a discount broker. They normally discount the contribution fee up to 100% (but they still accept trails).

They include:

TIP: If you’ve already invested funds with a planner who draws a commission from your contribution fee but doesn’t provide ongoing service and you’re making ongoing contributions to your investment, you can transfer your funds to a discount broker. Check their website for a broker transfer form.

Use the answers to these questions to compare similar funds. Most of the information can be found in the fund’s product disclosure statement (PDS).

  • What are the manager’s risk and return objectives, as stated in the product disclosure statement, and do they match your investment strategy?
  • What has been the short, medium and long-term performance of the fund, and does it match the manager’s objectives?
  • How volatile is the value of the investment and does this match the manager’s risk objectives?
  • Are there any current issues you should be aware of, such as key staff leaving the fund manager? A financial adviser might be able to tell you.
  • How easy would it be to get your money back? Can you request withdrawals by phone or online, how long does it usually take, is there a minimum account balance and in what amounts can you redeem money? Can the manager apply a waiting period before processing your withdrawal request?
  • What fees are involved? Use the fee calculator to keep track of them.
  • Is it possible to switch your money to another fund with the same manager, and would you have to pay a fee for this?
  • What’s the minimum initial investment and what are the minimum amounts you can add to it?
  • Can you make regular extra contributions (a savings plan)?
  • How often does the fund manager distribute income and can you reinvest this in the fund?

Managed funds and tax

Taxation is a complex issue, for example only 50% of the capital gains is taxed for some funds’ returns. Check with your financial planner, accountant or tax adviser whether a fund is suitable for your tax requirements.

Do your homework

Get as much information as possible about any fund you’re interested in, including its current product disclosure statement. This will tell you the types of investments the fund manager can buy and whether it’s designed to produce income or growth or a combination of both. Use our checklist for what to look for.

  • Data from rating agencies such as ASSIRT (Standards & Poor's), Morningstar, van Eyk or InvestorWeb can also be useful in your research. However, their opinions may differ as they all use a different methodology for their ratings.
  • Diversify: after you’ve satisfied yourself that the funds you’ve picked are right for you, choose at least a couple, rather than giving all your money to one manager. By diversifying you’ll reduce your risk.
  • Drip-feed your fund: another smart step is to ‘drip-feed’ money into managed funds by using a regular savings plan, smoothing out volatility by buying in at various prices. This is a great way to make your wealth grow without too much pain.
  • Don’t chop and change: once you’ve made your choice, stick to it — chopping and changing could cost you money. Fund managers use many different techniques, and depending on market conditions, sometimes one style works better than another. Keep in mind that managed funds are a long-term investment, so you should expect short-term fluctuations and don’t need to be panicked by them. If you’re seriously concerned about the performance of one of your investments, consider getting financial advice before you take action.

More information

Some online discount brokers have fund profiles and other information on their websites.

Financial advisers/planners have access to managed funds research and should be able to answer your questions.

The Financial Planners Association (FPA) can give you a list of planners in your area. Contact it on 1800 626 393, or visit the website: www.fpa.asn.au.

Before investing in a managed fund, check that the ‘responsible entity’ is licensed and the scheme is registered with the Australian Securities & Investments Commission (ASIC). Contact ASIC on 1300 300 630 or www.fido.asic.gov.au.

The National Information Centre on Retirement Investments Inc (NICRI) provides free information about financial planning and specific investment products. Call 1800 020 110 or (02) 6281 5744. Nicri’s moneymap website at moneymap.nicri.org.au has a number of calculators to work out loan, investment and savings scenarios.

Your say - Choice voice

Make a Comment

Members – Sign in on the top right to contribute to comments