A Guide To Investing In Managed Funds

Margaret Lomas is an Australian property investment expert, TV host, and qualified financial adviser. She is the best-selling author of eight property investment books, including *How to Invest in Managed Funds*, first published in 2002. In the book, Lomas explains how managed funds offer investors with relatively small sums of money the opportunity to access a range of investments across a spectrum of asset classes. She covers all aspects of investing in managed funds, including types of funds, how returns are made, and when to use financial planners.

Types of funds, their structure and regulation

Mutual funds are a common type of investment company, and they are categorised as open-end funds, allowing investors to purchase and redeem shares daily, based on the net asset value (NAV) of their shares. The NAV is calculated by adding up the fund's total investment holdings, subtracting fees and expenses, and then dividing that amount by the number of shares held by investors.

There are four main types of mutual funds: stock funds, bond funds, balanced funds, and money market funds. Each fund type has different investment objectives, such as growth, income, or a combination of both.

Stock funds invest primarily in stocks or equities, with subcategories based on the size of the companies they invest in, their investment approach, or whether they focus on domestic or foreign equities.

Bond funds invest in bonds and other fixed-income securities, and they can be further classified by the type of issuer, maturity, or credit rating of the bonds they hold.

Balanced funds, also known as asset-allocation funds, invest across different types of securities, such as stocks, bonds, money markets, or alternative investments, with the goal of reducing risk through diversification.

Money market funds invest in short-term debt instruments, like Treasury bills, and very short-term corporate debt, and are considered low-risk, cash-equivalent investments.

Mutual funds are registered with and regulated by the Securities Exchange Commission (SEC), and they are subject to various rules and regulations to protect investors.

The structure of mutual funds typically involves a separation of funds and managers, where the fund's investment assets and liabilities are held in one entity, while the management company holds the operational assets and liabilities in a separate entity. This structure limits the fund investors' control over the management company and their exposure to the management company's profits and liabilities.

The fees and expenses associated with mutual funds vary and can include management fees, 12b-1 fees, transaction fees, account fees, redemption fees, exchange fees, and purchase fees. It is important for investors to understand the fee structure of a mutual fund before investing.

How returns are made and measuring fund performance

In her book, "How to Invest in Managed Funds", Margaret Lomas explains the intricacies of investing in managed funds. She discusses various aspects of investing in managed funds, including how returns are made and how to measure fund performance.

How Returns Are Made

Managed funds, also known as mutual funds, offer investors with small sums of money the opportunity to access a diverse range of investments across different asset classes. These funds are managed by professionals who pool money from multiple investors to purchase a portfolio of stocks, bonds, or other securities. This allows individual investors to benefit from economies of scale and spread risk across multiple investments.

There are three main ways in which investors earn returns from mutual funds:

• Dividend/Interest Income: Mutual funds distribute dividends on stocks and interest on bonds held in their portfolio. Investors can choose to receive a cheque for distributions or reinvest earnings for additional shares in the mutual fund.
• Portfolio Distributions: If the fund sells securities that have increased in price, it realises a capital gain, which is passed on to investors as a distribution.
• Capital Gains Distribution: When the fund's shares increase in price, investors can sell their mutual fund shares for a profit.

Measuring Fund Performance

Measuring the performance of a mutual fund involves analysing various factors, including the fund's design, investment mandate, and the contribution of the fund manager. Here are some key considerations when measuring fund performance:

• Understanding the Fund's Design: Most mutual funds follow a specific strategy, such as aggressive growth or moderate risk. It's important to understand the fund's stated investment mandate, which specifies the types of companies and characteristics the fund will focus on.
• Analysing Sector Weights: Mutual funds are often analysed by weighting the stocks by sector and comparing them to relevant indexes or benchmarks. This helps determine the fund manager's allocation decisions and their impact on performance.
• Attribution Analysis: This analysis evaluates whether the fund manager's approach is top-down or bottom-up. A top-down approach considers global trends and macroeconomic factors, while a bottom-up approach focuses on company-specific criteria like valuation, earnings, and growth.
• Performance Measurement: Mutual fund performance is typically measured by comparing the stocks by sector and weight to their corresponding indexes or benchmarks and summing up the results. This provides insight into the fund's overall performance and how it aligns with its stated objectives.

When to use financial planners

Margaret Lomas is a well-known property investment expert and author of several books on property investing. In her book 'How to Invest in Managed Funds', Lomas offers insights on various aspects of investing in managed funds, including when to use financial planners. Here are some detailed instructions on when to seek the help of a financial planner:

Major Life Events

Life events such as graduating from college, getting married, starting a family, or launching a business can significantly impact your financial situation. A financial planner can assist you in navigating these transitions while ensuring you stay on track with your financial goals. They provide valuable guidance and expertise to help you make informed decisions and adjust your financial strategy accordingly.

Lack of Experience

If you're new to investing or have complicated finances, hiring a financial planner can be beneficial. They possess the knowledge and experience to guide you through various investment options and strategies. Financial planners can educate you on investment concepts, helping you make well-informed decisions and avoid costly mistakes.

Strategy Development and Goal Setting

Financial planners excel at helping you define and work towards your financial goals. They assist in identifying your short-term and long-term objectives, crafting a comprehensive financial plan, and offering advice on investing, budgeting, retirement planning, and more. Financial planners serve as your partners in achieving financial milestones and provide ongoing support and adjustments to your strategy as needed.

Complex Financial Situations

As your financial situation becomes more intricate, the expertise of a financial planner becomes increasingly valuable. They can provide objective advice and specialised knowledge to address your unique circumstances. Whether it's managing diverse investment portfolios, navigating tax complexities, or planning for significant purchases, a financial planner can help you optimise your financial decisions and strategies.

Life Transitions and Uncertainty

Life transitions, such as divorce, inheritance, or career changes, can be financially challenging. Financial planners offer valuable support and guidance during these uncertain times. They can assist in managing the financial implications of such transitions, ensuring that you make prudent decisions and maintain financial stability.

Remember, when choosing a financial planner, it's essential to consider their credentials, specialisations, and whether they act as fiduciaries, putting your best interests first. Conduct thorough research, interview multiple candidates, and ask relevant questions to find a financial planner who aligns with your needs and goals.

Matching a managed fund to your investor profile

Margaret Lomas's book, "How to Invest in Managed Funds", offers a comprehensive guide to matching a managed fund to your investor profile. Here are some key points from the book:

Understanding Investor Profiles:

Firstly, it's important to understand different investor profiles. Investor profiles can vary based on factors such as risk tolerance, investment goals, time horizon, and financial circumstances. Some common investor profiles include conservative, moderate, and aggressive investors. Conservative investors prioritize capital preservation and are more risk-averse. Moderate investors seek a balance between capital preservation and growth, while aggressive investors are willing to take on higher risks for potentially higher returns.

Assessing Your Risk Tolerance:

Risk tolerance is a crucial factor in matching a managed fund to your investor profile. Consider your comfort level with market volatility and the potential for losses. Are you comfortable with higher-risk investments that offer greater potential returns, or do you prefer more stable and secure options? Understanding your risk tolerance will help you choose between different types of managed funds, such as equity funds, bond funds, or balanced funds.

Aligning Investment Goals:

Different managed funds cater to different investment goals. Some funds may focus on capital growth, while others emphasize income generation or capital preservation. For example, if you're investing for retirement, you may prioritize funds that offer stable, long-term growth. On the other hand, if you're saving for a short-term goal, you might prefer funds that provide regular income or more liquid investments.

Time Horizon and Investment Strategy:

The time horizon of your investment also plays a role in matching a managed fund to your investor profile. Long-term investors can typically handle more volatility and may be better suited to growth-oriented funds. On the other hand, short-term investors might prefer more conservative strategies to protect their capital. Consider your investment horizon and choose funds that align with your timeframe.

Personal Financial Circumstances:

Your financial circumstances, including your income, savings, and overall net worth, will also influence the managed funds that align with your investor profile. Some funds may have higher minimum investment requirements, while others are more accessible to investors with smaller sums of money. Consider your financial situation and choose funds that fit within your budget and financial goals.

Diversification and Asset Allocation:

Diversification and asset allocation are key considerations when matching a managed fund to your investor profile. Diversification helps to mitigate risk by spreading your investments across different asset classes, sectors, and geographic regions. Consider your investor profile and choose funds that provide an appropriate level of diversification to balance risk and return potential.

In conclusion, matching a managed fund to your investor profile involves carefully considering your risk tolerance, investment goals, time horizon, and financial circumstances. By understanding these factors, you can select managed funds that align with your profile and help you achieve your financial objectives. Margaret Lomas's book provides a detailed guide to navigating these factors and making informed investment decisions.

Maintaining a balanced portfolio using managed funds

Lomas suggests that managed funds can offer investors with relatively small sums of money access to a diverse range of investments across different asset classes. This diversification can help to reduce risk and ensure a balanced portfolio. For example, investors can access a variety of investments such as bonds, equities, and property through managed funds, rather than investing directly in a single asset class.

Additionally, Lomas advises on the importance of matching a managed fund to your investor profile. This includes considering your financial goals, risk tolerance, and time horizon when selecting a managed fund. By choosing a fund that aligns with your investor profile, you can maintain a balanced portfolio that meets your investment objectives.

Furthermore, Lomas provides guidance on measuring fund performance and monitoring your portfolio over time. This includes understanding how returns are generated in managed funds and assessing the impact of fees and other costs on your overall investment performance. Regular portfolio reviews can help identify areas that may need rebalancing to ensure your investments remain aligned with your financial goals.

Overall, by utilizing managed funds, investors can gain access to a diversified range of investments and benefit from professional fund management. By carefully selecting funds that match their investor profile and regularly monitoring their portfolio, individuals can work towards maintaining a balanced portfolio to meet their financial objectives.

Frequently asked questions