What Are Managed Funds, and Should You be Investing in Them?

Managed funds aren’t as scary (or boring) as they sound. In the hands of the right manager, they are an excellent way to invest and make money with risk levels you are comfortable with.

On the ’income’ side of every budget or income declaration form, there’s a space for salary and wages, and then ‘other income’. If you’ve always wondered what’s supposed to go in that space, your income from managed funds and investments goes there. It’s basically putting your money to work for you, while you relax and carry on your life.

What are managed funds?

2.8 million Kiwis already have managed funds, and you are probably one of them. If you have a KiwiSaver account, then you already have a type of managed fund.

Instead of investing directly and doing it all yourself, a managed fund allows you to pool your money with other investors’ money. This fund then makes investments on your behalf (and everyone else who has contributed to the fund). Because of “strengths in numbers”, you are able to participate in investment opportunities that would otherwise not be possible if you were to try invest by yourself – such as commercial property ventures, and other investments which set minimum participation levels

As an investor in a managed fund, you own a portion of the total fund equivalent to your contribution.So if your total contribution makes up 0.005% of the overall fund, that’s how much you own. The interest or dividends paid out to you will also be equivalent to your percentage ownership. Say the fund pays out $1m in dividends at the end of the year; your 0.005% will earn you $5,000 (before tax) in additional income.

Each fund has a set of rules about what can be invested in. Some are limited to an investment type, while others are spread across different types. You can invest in a single fund or a mix.

Not all managed funds have the same tax rules either. For example, a PIE (Portfolio Investment Entity) may suit you better as they have special tax rules which could result in you having to pay less tax. It’s worth getting advice from a qualified financial adviser to make sure your personal circumstances are taken into account when choosing a managed fund.

Different funds have different risks

No matter how tolerant or intolerant you are to risk, there is a fund type to suit you. Managed funds can have a ‘general’ focus, or be aggressive, balanced, conservative, defensive or growth focused.

Aggressive: Investments are made in assets that show potential for high growth. The objective is to achieve a high level of real returns over the medium to long term primarily through investment in equities, accepting that the returns may be subject to significant short term variations. (It may be a bumpy ride!).

Of course, the higher the potential rewards the higher the potential for loss. These aggressive funds are often riskier than other fund types.

Balanced: Intermediate, or hybrid funds usually invest in an equal mix of income assets (e.g cash, fixed interest, bonds) and growth assets (e.g. equities and listed property).

A balanced fund seeks to reduce the likelihood of negative returns over the short to medium term while still providing a reasonable opportunity for positive real returns over the longer term.It’s the “middle ground” whichoffers relative safety while still delivering good returns. They are a good long-term investment option.

Conservative: Low in risk, these funds invest more in low risk income assets and less in high risk growth assets. While a fund manager will try to have the capital increase as well as income, it will be slow and steady.

Defensive: A defensive managed fund strategy is one where the primary goal is to minimise any capital loss in the portfolio. They generally offer some protection against volatile markets.

Growth: A portfolio of diversified stocks that likely has little dividend pay-outs, but instead focuses on capital gain.  It’s a higher risk option as the assets invested in are usually the high risk growth assets such as overseas equities, domestic equities and property.

Alternatively, a managed fund can focus on a certain type of investment, such as commodities, shares, or developing and emerging markets.

What are the risks involved ininvesting in managed funds?

There are risks in everything in life. Investing in anything carries the risk of losing money. There could be a capital loss, where the price of an investment drops below what was originally paid for it. There is the risk that an investment will underperform and not produce the anticipated returns. And finally, there’s the risk that administrative, management, performance-based and member fees may outstrip any earnings or minimise the profit made.

Not all funds can be easily accessed either. Like term deposits, some funds are not able to be accessed until set times (for instance, KiwiSaver can only be accessed at age 65 or when suffering from extreme hardship) so you need to consider this in advance.

How can you find a good investment fund manager?

Do some research and ascertain what type of investment you want to make. Whether it’s type of market you want to invest in or the style of investment, find a fund manager that specialises in that.

Investigate their fees. What happens if the fund makes a loss? Are you still required to pay management fees? How much? Fees can vary hugely across the types of funds, this is worth asking about.

Make sure the fund manager or provider is licensed by the FMA (Financial Markets Authority). This means they have to meet minimum legal standards, and they are monitored by the FMA.

Ask about their experience and education. Look at fund performance. While the past is no guarantee of future performance, you can look for trends and consistency over time. Also check the risk indicator on the fund type, which can be found in the product disclosure statement. This makes it easier for you to compare funds and understand the risks.

Check your funds regularly! Once a quarter, your fund manager will furnish you with an update. This will tell you your fees, how the fund was actually invested, the top ten investments that the fund is comprised of, and the risk indictor and any changes to the risk.

If this sounds like more work than you care for, speak to a qualified financial adviser and let them do this for you!

Are managed funds for you?

First, decide how much risk you’re willing to take. Not all risk is bad, but you should never gamble something you can’t afford to lose. You can minimise your risk by spreading your investments across a range of industries, companies, assets and organisations.

Then, check out what level of return you can expect from this fund. Is this acceptable and reasonable?

Check the fees and see if this is fair. High fees can make a serious dent in any gains you make. If the market has performed badly overall, then a lower gain is to be expected, but if the market is flourishing, you should expect returns.

If you are OK with some risk, but not wanting to be involved in the day to day process of investing then managed funds could be ideal for you.

If you decide managed funds are a good way for you to invest, seek the advice of a qualified financial adviser to make sure you choose the managed fund that is right for you.