How To Choose The Right Managed Funds

If you're looking to invest your money, a managed fund could be a good option. A managed fund is a type of investment where your money is pooled with that of other investors, and a fund manager buys and sells assets on your behalf. There are thousands of managed funds to choose from, so it's important to do your research and understand the different types of funds, their risks, and their returns. In this article, we'll explore the different types of managed funds, the benefits and drawbacks of investing in them, and how to choose the right one for you. We'll also discuss the fees associated with managed funds and how they can impact your returns. By the end, you should have a better understanding of whether investing in a managed fund is the right decision for you and how to get started.

Single asset vs mixed asset funds

When deciding which managed funds to invest in, it's important to understand the difference between single-asset and mixed-asset funds.

Single-asset funds focus on one type of investment, such as stocks, bonds, cash, or real estate. Investors who choose this type of fund are concentrating their capital in one specific area. For example, an investor might choose to invest only in stocks, believing that this will bring higher returns. However, this approach also comes with higher risks. If the particular asset class underperforms, the investor's portfolio will suffer.

On the other hand, mixed-asset funds, also known as multi-asset or balanced funds, offer a combination of asset classes. These funds typically include a mix of stocks, bonds, cash, and sometimes real estate. By diversifying their investments across multiple asset classes, investors can reduce the overall risk of their portfolio. While one asset class may underperform, another may outperform, thus balancing out the returns. Mixed-asset funds are designed to match an investor's risk tolerance, ranging from aggressive to conservative. For example, an aggressive-style fund may allocate 85% of its assets to equities, while a conservative fund will have a higher concentration in fixed income and cash.

One of the key benefits of mixed-asset funds is their ability to provide stability and reduce risk. The bond portion of a balanced fund, for instance, helps to offset the risks associated with the stock portion. Additionally, mixed-asset funds offer automatic asset rebalancing, ensuring that the investor's portfolio remains aligned with their chosen asset mix. This is particularly advantageous for investors who may not have the time or expertise to actively manage their portfolio.

Mixed-asset funds also provide greater diversification compared to buying individual bonds and stocks. A single balanced fund can hold hundreds or even thousands of bonds and stocks, spreading out the investor's exposure to risk. This level of diversification is typically challenging to achieve with single-asset funds.

However, it's important to note that mixed-asset funds may hinder potential returns compared to single-asset funds. Since mixed-asset funds are often designed to meet or beat a benchmark, they may not always achieve the same high returns as a single-asset fund that happens to be performing well during a particular period.

In conclusion, when deciding between single-asset and mixed-asset funds, investors should carefully consider their financial goals, risk tolerance, and the level of involvement they wish to have in managing their portfolio. Single-asset funds offer the potential for higher returns but come with greater risk. Mixed-asset funds, on the other hand, provide stability, diversification, and reduced risk but may not always deliver the highest returns.

Listed vs unlisted funds

Managed funds are either listed or unlisted. Listed managed funds are traded on the share market, meaning they can be bought or sold on the share market through a broker. Unlisted managed funds, on the other hand, are not traded on a share market. To purchase or sell units in an unlisted fund, you deal directly with the fund manager.

Listed funds are valued daily according to their price on the relevant stock exchange, whereas unlisted funds are usually valued less frequently, based on the value of the underlying assets held by the fund. Unlisted securities are usually issued by smaller or new firms that cannot or do not wish to comply with the requirements of an official exchange, such as market capitalization thresholds or listing fees. They are often less liquid than listed securities and carry greater risk.

The key difference between listed and unlisted funds, according to Magellan, is that a listed entity is a company structure in which you buy shares, whereas the unlisted version is a trust, so you are buying units. However, in Magellan's case, the experience of investing in their listed and unlisted funds is very similar: the holdings, portfolio manager, and distribution policy are the same.

Fees and charges

Establishment Fee:

This is the cost of opening your investment account. The establishment fee typically ranges from 0% to 5% of the initial investment amount.

Contribution Fee:

The contribution fee is charged on each amount contributed to your investment. It usually falls between 0% to 5% of the contribution amount.

Management Fees and Costs:

Management fees cover the expenses of managing your investment. These fees are typically deducted directly from your account balance and can range from 0.5% to 2.5% per year.

Performance Fee:

Some fund managers charge an additional performance fee if the fund's returns exceed a predefined benchmark or target.

Adviser Service Fee:

This is an ongoing fee paid to your financial adviser for their services in arranging the investment. Adviser service fees typically range from 1% to 2% per year.

In addition to the fees mentioned above, managed funds may also charge transaction fees, withdrawal fees, or fees for changing investment options or exiting the scheme. It is important to carefully review the product disclosure statement (PDS) to understand all the fees associated with a particular fund. Small differences in fees can significantly impact your investment returns over time.

Online tools such as the managed fund fee calculator can help you understand how fees affect your investment returns. Additionally, some platforms offer comparisons of managed funds, including information on their fees and features, to help you make informed decisions.

Risks and volatility

When considering investing in a managed fund, it is important to understand the associated risks and volatility.

Firstly, it is crucial to recognize that managed funds, also known as mutual funds, involve pooling your money with other investors. This pool of funds is then managed by a fund manager, who makes investment decisions on your behalf. These decisions typically involve buying and selling securities, such as stocks, options, futures, and fixed-income securities. While fund managers aim to generate returns that surpass market benchmarks, investing in managed funds carries several risks that investors should be aware of.

One of the key risks is market volatility. Managed funds, especially those focused on volatility management, strive to minimize the impact of stock market swings on your investments. However, it's important to remember that these funds still invest primarily in stocks, which are inherently volatile. Stock prices can be influenced by various factors, and even professional fund managers cannot predict market movements with perfect accuracy. Therefore, the value of your investments in a managed fund can fluctuate, and you may experience losses if the market takes an unexpected turn.

Additionally, managed funds often carry fees that are higher than those associated with index funds or ETFs. These funds are actively managed, and the expertise of the fund manager comes at a cost. Higher fees can eat into your investment returns, so it's essential to carefully review the product disclosure statement or other relevant documentation to understand all applicable fees before investing.

Another risk to consider is the potential for a managed fund to underperform relative to the market or its benchmark. Even with skilled fund managers, there is no guarantee that the fund will consistently generate high returns. Past performance does not always predict future results, and various factors can influence a fund's ability to meet its investment objectives. Therefore, it is crucial to assess a fund's track record and the skill of its manager before investing.

Furthermore, managed funds may have minimum investment requirements, and the complexity of their investment strategies can be challenging to navigate. Some funds require substantial minimum investments, which may pose a barrier to entry for some investors. Additionally, understanding how these funds operate and the specific strategies they employ can be complex. Investors should take the time to educate themselves about the fund's investment strategy, portfolio composition, and associated risks before committing their capital.

In conclusion, while managed funds offer the advantage of professional management and the potential for high returns, they also carry risks and volatility. Investors should carefully consider their risk tolerance, investment goals, and the specific characteristics of the managed fund before making any investment decisions. Understanding the fees, investment strategies, and historical performance can help you make more informed choices and manage your expectations regarding potential returns and risks.

Returns and performance

When it comes to returns and performance, there are a few key things to consider when investing in managed funds. Firstly, it's important to look at the long-term performance of a fund, typically over a period of 5 to 10 years. This gives you a better indication of how the fund is likely to perform in the future, as a fund that performs well in one year may not perform as well in the next.

You can compare the returns of a managed fund against index funds that invest in the same asset class or similar managed funds to see how it measures up. Additionally, you should also consider the risks associated with the fund, as you may be able to invest in a fund with a similar return for a lower level of risk.

Fees are another important factor that can significantly impact your returns. Managed funds charge a range of fees for managing your money, including establishment fees, contribution fees, management fees, performance fees, and adviser service fees. Small differences in fees can have a large impact on your overall returns, so it's important to understand the fee structure before investing.

When investing in managed funds, it's also worth noting that past performance is not a reliable indicator of future performance. Returns can vary greatly from year to year and can even be negative, especially when investing in higher-risk assets such as shares and property.

To make an informed decision, be sure to review the product disclosure statement (PDS) of the fund, which will outline the fund's historical returns, risks, fees, and other relevant information. Additionally, consider seeking advice from a licensed financial adviser to ensure you're making the right investment choices for your financial goals and risk tolerance.

Frequently asked questions