Managed funds are a simple way of investing in the sharemarket without having to decide which shares to buy. They are basically a collection of many individuals' money into the same investment scheme and, as the name suggests, managed by investment professionals, often referred to as Fund or Portfolio Managers. (If you've heard the term "Mutual Fund", don't get confused - this is an American term for the same sort of vehicle but is not a term used in the Australian market.)
Such funds offer a great way to start investing with a minimal amount of money. Managed funds typically provide you with an easy option of adding to your initial investment at frequent intervals, as opposed to say shares where the cost of trading is higher so not so easy to add small amounts to your portfolio on a regular basis. They are a great way to save for your future, require very little ongoing effort, and in most cases you can opt to have funds transferred into your fund automatically every month. By adding to your investment regularly, you’ll sometimes be buying more units at a lower price, sometimes less units at a higher price but by adding frequently this will enable you to be "dollar cost averaging".
For the services of your fund manager, you will pay a management fee (typically a percentage of your portfolio value) but if this enables you to have money where you can’t easily touch it and it’s gaining in value (which you would expect over a long timeframe) it’s worth the cost and also it takes the stress and the emotion out of your investment decisions. As the fund manager is not emotionally involved, they are in a better position to accurately evaluate the situation and make the correct decisions and you are paying for their expertise.
Before choosing a fund to invest in, do your research and read the prospectus, compare the fund's past performance and look at the fees they charge comparing different funds. Don't jump from fund to fund because the top performing fund of last year is not necessarily going to be the top performing fund the next year. You can also reinvest your distributions thereby growing your units held.
It is also worth noting that managed funds, because of their size, often have opportunities open to them that otherwise would not be available to you as an individual investor. They will use many different brokers to buy/sell their shares therefore enabling them to have varied research and opportunities that will arise such as Placements and IPO's giving them good opportunities often not available to retail investors (only sophisticated or Institutional Investors).
It is also worth talking to your accountant about taxation implications of being in managed funds, as you are likely to incur capital gains each year as well as a capital gain liability at disposal (assuming your fund makes money over the time you hold it).
Pros
- Leverage buying power of large investment pool
- Does not require you to make investment decisions yourself
- Easy to make small, regular additions to your investment
- Good long-term prospect of creating wealth
Cons
- Management fees can be high (watch out for additional fees above certain performance benchmarks too)
- You have very little control over the investment decisions being made
- Tax effectiveness is questionable in some cases
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