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Invest in a Managed Fund

Once you’ve identified your goals and have an idea about the type of fund you’re interested in, it’s time to find the right one for you.

Sand through the hourglassFive things to consider

1) Solid results over time

Consider looking at the results of funds over at least a five-year period so you know they have a sound track record.

Morningstar is an independent provider of investment portfolio information that gives star ratings out of five. Think hotel reviews, but for managed funds. You can find Morningstar ratings online (type in the details of any fund you might be looking at and Bingo!), in the Australian Financial Review’s Smart Investor magazine (comes out monthly) or in the financial pages of the big newspapers.

Use an online broker such as CommSecInvestSMART or YourShare (to name a few) and download a prospectus (often called a Product Disclosure Statement or a PDS) for more information if you find a fund you might be interested in. Some online brokers like YourShare rebate up to 100% of entry fees and sometimes ‘trailing’ fees as well. By law a fund must register a prospectus with the Australian Securities and Investments Commission. This document is required to be updated every 12 months and outlines risk and opportunities as well as a summary of fees and costs plus the fund’s recent results.

2) The managed fund objectives match your own

Understand the objective of the fund and decide if its goals are same as your own. Funds usually write their objectives on the fact sheet or in their PDS along with a recommended investment time frame.

3) Fees

Ahhh…fees, they pop up everywhere. Fees to look out for include:

Commissions: Fund managers often pay a commission (usually between 0% and 4%) to the people or firms distributing their funds, often financial advisers.

Entry fees: These typically range from 0% to 8% depending on the type of investment. This can be added to the amount you invest or deducted from the balance.

Ongoing management fees: Often called an MER (Management Expense Ratio) this is generally between 0.5% to 3% of your total investment. Different types of funds charge different types of fees. For example, international share funds tend to have higher MERs than Australian share funds while index funds tend to charge the lowest fees.

Cheese in mousetrapExit fees: Some funds charge exit fees or performance fees if a fund does particularly well.

Moneygirl recommends

MoneySmart – managed funds calculator

The Australian Securities and Investments Commission website MoneySmart has a good calculator that allows you to compare two funds taking into account their fees and how much you contribute over time.

YourShare

Money Magazine picked YourShare as it’s winner of ‘Best Cash-Back Provider’ for six years in a row. If you nominate YourShare as your broker, they receive hidden commissions on your behalf and pass on a share of them to you. Worth checking out and comparing to the other online brokers mentioned above.

4) Regular investment plan

Consider setting up a regular investment plan and contributing a set amount to a fund each month. Because you’ll automatically be making contributions every month (both when the market is doing well, and when it isn’t) the price at which you’ll be buying units in the fund will generally average out in the long run. This can be a good thing for the average investor who wants to build up their investment over time by making regular contributions, as timing the market becomes less important. This is called dollar cost averaging.

5) Tax implications

You’ll need to decide whether you want to keep or reinvest any distributions you receive. Either way you’ll be taxed at your marginal tax rate in the year that the income was earned. You’ll also be taxed when you sell any units in your fund (capital gains tax).

Note: if you’re investing in Australian shares there’s a good chance your dividends may be ‘franked’ – at it’s most basic, this means that tax has already been paid on the earnings by the companies the fund invests in. You can find this information in the fund’s PDS or fact sheet. Most managed funds in Australia send out a ‘tax sheet’ showing you how to incorporate your fund’s activity for the year into your tax return – makes it pretty easy.

Moneygirl recommends

MoneySmart – Steps for choosing a managed fund

MoneySmart has some good advice about what to look for when investing in managed funds.

Find a financial adviser

Check out the Australian Securities and Investments Commission’s website MoneySmart – it has loads of great information about obtaining personal financial advice and finding a qualified financial adviser. Experts often suggest you find an adviser who charges by the hour instead of receiving a commission.

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>> Next in Managed Funds – Nuts and Bolts

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