When people consider investing, many think about buying a house or shares.
However, you may be better off pooling your money and using a managed fund to achieve your financial goals.
If you simply use your own money to invest you are limited in how broadly you can spread your investment. For instance, some investments such as commercial property could be out of your reach. Managed funds offer you the power to pool your money with other investors creating access to a greater number of investments.
For example, if you had $10,000 to invest and decide to invest directly in the stock market, you could only afford to buy a small amount of shares in one or two companies. On the other hand, if you pool your money with other investors, using a managed fund, you can spread your investment across a variety of sectors eg retail, manufacturing and industrial companies. And, you can also invest across a range of fund managers using a multi-manager fund.
Investing across a wider variety of assets allows you to create a diversified investment portfolio. This is important because investment performance is cyclical and although there will always be peaks and troughs, diversification allows you to balance out short-term troughs with peaks in performance. This ultimately smooths out your investment performance over time.
Managed funds are, as the name suggests, managed by professional investors – known as investment managers or fund managers. They have the skills, experience and research resources not available to the average individual investor.
An investment manager will have a number of skilled professional people working with them to:
- Research and analyse the share including a company’s financial performance, cash flow, the industry’s market size, competition plus aspects like the company’s management stability.
- Allocate the pool of money to the fund to maximise return with an appropriate level of risk.
You can leverage this expertise rather than having to do all the research and asset allocation yourself. This not only saves you time but protects you from making bad investment decisions.
Overseeing and managing investments by yourself would take a significant amount of time. A fund manager administers the fund for you so that you can simply review periodic reports to see how the fund is performing and make changes if your objectives or risk profile has changed.
What types of managed funds are there?
There are different types of managed funds depending on what you want to achieve and your risk profile.
Single sector funds
Single sector funds invest in just one asset class, such as cash, shares or fixed interest. Single sector funds may also specialise in certain sectors, for example resource companies.
Multi-asset funds invest across more than one asset class such as shares, property, infrastructure and fixed interest. Diversifying across different asset classes is likely to reduce your level of risk. This is because different asset classes are influenced by different factors so they are likely to behave differently throughout the economic cycle.
A multi-manager fund is a fund comprised of more than one fund which can be within the same asset class or across various asset classes. Each fund has a separate fund manager, with different investing styles. Multi-manager funds work on the premise that investment managers operate differently in different environments and by diversifying across fund managers, risk is reduced.
Growth funds are long-term investments (5+ years), focused on capital growth rather than income and include shares, property and other alternative investments.
Income funds are usually shorter term investments, such as cash and fixed interest, and typically have lower risk than growth assets.
Passive funds aim to achieve performance returns in line with a market index, such as the S&P/ASX 200. These funds are also known as Index funds.
Active funds aim to outperform an index. They typically have a higher fee than passive funds to compensate the investment manager for their expertise and resources.