How managed funds work: definition, pros, cons, types

By Sam 3 December 2018 3 min read

If you’re starting out as an investor you may have heard about investment products called managed funds, but you may not be quite sure exactly what they are or how they work.

There are lots of concepts to get your head around when it comes to financial products and understanding managed funds can get a bit tricky, especially if you’re a novice investor.

With that in mind, here are some of the basics about managed funds to help you figure out if they’re an investment product that suits your needs and circumstances.

What is a managed fund?

Simply put, in a managed fund your money is pooled together with other investors into one fund, and then a professional investment manager invests and controls it on your behalf.

This management aspect of a managed fund contrasts, for instance, with investing directly in, say, shares, property, or bonds where you make the investment decisions yourself.

When you invest in a managed fund, you get units in the fund, with each unit representing an equal portion of the fund’s value (which is usually the net market value of the assets in the fund).

Distributions represent the income received in respect of the assets of the fund, and the price of each unit (i.e. the unit price) will fall or rise in line with the value of the underlying assets.

For many investors, including people with limited market knowledge, managed funds can be an attractive investment for several reasons.

What are the benefits?

Professional management

One of the big advantages is that a professional fund manager is managing the assets on your behalf, saving you the hassle and time involved in direct investing.

Another positive is that the fund manager has access to research and information that helps them determine which assets to buy and sell as well as industry experience and knowledge.

Diversification

An added plus is that managed funds are a simple way to access a diversified portfolio with one investment, which helps spread investment risk across different assets.

This is because diversification enables you to gain exposure to various market sectors and asset classes (such as Australian or international shares, property, or bonds).

Access to investments

By pooling the money of many investors managed funds can access a range of investments, such as industrial property like shopping centres or office towers or infrastructure like toll roads, that may not be normally available to individual investors.

For instance, in reality, an investor with $5,000 to invest could probably only purchase one or two stocks directly in a cost-effective manner, but by investing via a managed fund it’s not unusual for investors to gain exposure to multiple stocks.

Convenience

Unlike direct investing, managed funds take a lot of the hassle out of investors’ hands. It’s the professional fund manager’s responsibility to look after things like buying and selling decisions, rights issues and collecting income, which can be a plus for time-poor investors, or newbies.

What are the risks?

Like with any investment product there are risks and you should seek financial advice before diving into investing in a managed fund.

It’s a good idea to consider the likely impact of fees on your returns. You may be charged higher fees than other investment types, although fees vary significantly between funds.

It’s also worth noting that unlike direct investing you rely on the skills of other people and don’t have control over investment decisions.

Other risks include that the fund you choose may underperform or decline in value or that the asset classes you’re invested in contains their own risks.

Further details of the risks relating to a managed fund will be set out in the offer document for the fund — this is usually a product disclosure statement.

Types of managed funds

Managed funds can be classified in several ways. This includes how they are managed — either passively or actively.

Passive investment funds involve a fund manager buying a portfolio of assets that track an index, such the S&P200, while active investment funds involve a fund manager undertaking analysis, and buying and selling investments, to outperform the market.

Another way to classify managed funds is according to the assets they invest in. They can either invest in one asset class like bonds or mortgages or a multi-sector option (like a balanced or conservative fund) that may invest in things such as shares, property, cash and fixed interest.

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Sam Right Chevron

Sam is an award-winning writer, producer and director who brings a wealth of experience as a storyteller and journalist for a range of leading media outlets.

How managed funds work: definition, pros, cons, types