Managed Funds 101
Managed funds provide a simple way to build a diversified, professionally managed portfolio of investments. Basically, you combine your money with other people’s money for the purposes of investing.
Also called unit trusts or managed investment schemes, managed funds were introduced in Australia in the 1930s. There are now a ridiculously confusing number of funds to choose from, each with different objectives and results. According to the Australian Bureau of Statistics, over $1.3 trillion is currently invested in managed funds in Australia.
How do managed funds work?
Managed funds are run either by large financial institutions such as banks or by smaller specialist management firms. The fund manager is responsible for investing the money individuals put into the fund according to the fund’s objectives.
Most commonly, money from investors is divided into units of equal value. How many units you get for your money depends on their price at the time you buy and how much moolah you invest. Unit prices fluctuate from day to day (this is determined by the market value of the fund’s investment) but the aim is that the value of the units increase over time. You may also receive regular distributions if the fund invests in companies that pay dividends (that is, a payment of cash from a company’s profit to shareholders) and if so you can choose to take these dividends as a payout (in cash) or in units reinvested into your account.
Where is your money invested?
This all depends on the objective of the particular fund. A professional investment manager could invest the fund’s pool of money in any mixture of cash, fixed interest securities (such as government bonds), property, Australian shares or international shares. These groupings of investments are called asset classes.
Pros and cons of investing in a managed fund
- You don’t need much money to start with (as little as $1,000 will get you started);
- You can invest in a range of investments (a fund can hold anything from a few to 50 or more stocks);
- Experts make the day-to-day decisions about what to do with the money and by law must use due diligence to manage your funds effectively;
- You can make regular contributions if you choose (e.g. each month);
- By investing over a long period of time and reinvesting any dividends your investment should enjoy the power of compounding.
- You have no control over where the money is invested (e.g. which companies), only the type of fund you choose;
- You will be charged management and withdrawal fees, which can really add up over time.
Managed funds and tax
Any distributions you receive are classed as income and taxed. You’ll also be taxed on any money you make if and when you sell your units (a capital gains tax).
Vanguard’s Plain Talk Library has lots of easy-to-understand general information about 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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