What is a managed fund?

Managed funds – the simplest form of investment?

A managed fund is a pool of investments that is managed professionally by an expert fund manager. In a managed fund, your money is pooled together with other investors' money to create a single fund that provides significant investor benefits, which include an instant increase in buying strength and tax efficiencies. An investment manager then buys and sells shares or other assets on behalf of all investors.

Why invest in a managed fund?

Flexibility and simplicity

Managed funds are a simple, diversified, low maintenance investment that offer different risk and return options to suit your needs.

Most managed funds have no (or very low) minimum investment amounts and can be contributed to and withdrawn from at will. This means you can deposit or withdraw your funds at any time. The simplicity and flexibility of managed funds mean that they're becoming increasingly popular. This is especially as most New Zealanders now understand the way KiwiSaver investments work and understand that the strict withdrawal criteria means that most people shouldn't invest more into their KiwiSaver scheme than they have to.

Another advantage of using a managed fund is that the manager will look after all the paperwork for you, the buying and the selling, the decisions on rights issues, the collection of income, rent and dividends, and so on. This offers most investors the luxury of many benefits that otherwise would have been out of their reach.

Diversification

Most managed funds are invested in a diversified array of stocks and bonds, and many also include a portion of investments in property. The number of investments held by a single managed fund can number as many as 2,000 across different countries, asset classes, industries and companies!

Some managed funds have investment choices of 100 percent into shares to suit those who are after big returns and don't mind taking on more risk. As this only invests into one type (or sector) of assets, it is called a ‘single sector’ managed fund. Single sector managed funds can be used on their own to provide exposure to a specific asset class, or together to create a diversified investment portfolio.

If you were to create your own optimally diversified portfolio, you would need to invest in a wide range of different securities from different sectors, and such a sufficiently diversified, self-managed portfolio would require immense amounts of research, monitoring, and investment. Even if you had professional help selecting profitable assets, you would face considerable expenses such as transaction fees, and could not access some of the exclusive investments that a large fund manager can.

Choice

There are a wide variety of managed funds to choose from, and within each managed fund there is nearly always a selection of different fund choices to meet your needs.

Security

While no investment is guaranteed, most managed funds are invested in the same way as a typical KiwiSaver Scheme, where investors' funds are held in trust, then invested into a diverse array of investments. This means you're not investing in the provider itself and instead, the investment manager invests in a wide range of external investments. A separate supervisor makes sure the funds go where the provider says they will. What's more, the Financial Markets Authority watches both the supervisor and the provider. If a provider were to get into financial difficulties, that shouldn't impact members whose funds are held in trust. The investments should be moved to a different provider, with all the investor funds still in them.

Taxation

Depending on a person’s circumstances, this can be one of the big advantages of investing in managed funds. This is because if you normally pay tax at 33 percent, you will only pay 28 percent tax on a typical managed fund. Even better, this usually won’t apply to the whole investment return.

How do managed funds work?

When you buy units in a managed fund, your money is pooled with other investors’ money and is spread across different kinds of investments. A manager chooses how the fund is invested and each investor owns a proportion of the total fund. The value of the fund goes up and down each day.

Each fund has its own rules about what the fund manager can invest in. Some funds invest in only one type of asset (such as property), while others spread the risk across different types of assets (for example, bonds, shares and property). You can invest in a single fund, or a mix of funds. It’s important to choose a fund that matches your appetite for risk, and your investment goals.

What are the risks of managed funds?

Funds that mostly invest in lower-risk assets such as bonds and cash will have more stable returns but are not likely to grow as much over the long-term. They often use names such as ‘defensive’, ‘conservative’, and ‘balanced’.

Funds that include less stable investments, such as property and shares, are more risky, but are also likely to have higher returns over the long term. They often use names such as ‘growth’ or ‘aggressive’.

When selecting a managed fund, what should I look out for?

Just like with your KiwiSaver provider, it pays to do your research before investing – as different managed funds offer different advantages and disadvantages.

Not all funds are named equal

When choosing a fund, make sure you find out the exact mix of investments. A ‘conservative’ fund choice from one investment provider will often invest in a different mix of underlying investments to a ‘conservative’ fund choice from another provider.

Fees

While managed funds are a very cost-effective way to invest, fees among different managed funds can differ greatly, and some even have ‘hidden’ fees for things such as making contributions and withdrawals. Avoiding such fees will ensure that you make the most of your investment, and achieve the best possible return on investment.

Restrictions

Some managed funds have restrictions, such as a limited number of fund choices, or minimum amounts that must be invested or the investment account can be closed.

Performance

While past performance is no guarantee of future returns, it can give you an idea how a fund has performed compared with similar funds, and how consistent returns have been over the long term.

Ethical investments

Owing to recent media attention, all investment managers will now tell you how ethical and socially responsible their managed fund investments are. However, the level of ethical approach can vary greatly, and it pays to check in detail exactly what you’re investing into!

The bottom line – managed funds

Managed funds offer investors some significant advantages including tax efficiency, flexibility, security, simplicity, and choice. As New Zealanders are becoming more aware of investments through KiwiSaver, many Kiwis are increasingly turning to a managed fund to meet their investment needs.

However, not all managed funds are created equal, so if you think this sort of investment may suit you, it’d be our pleasure to help you choose one. Please get in touch for a free and no obligation initial consultation.

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