How to choose a managed fund
Managed funds are investments where your money is combined with other investors' money, and a fund manager buys and sells assets, such as cash, shares, bonds, and listed property trusts on your behalf.
Choose the type of managed fund
Single asset managed funds are investment vehicles that specialize in a particular asset class. Here are some examples of single asset managed funds and the assets they invest in:
Cash funds: These funds invest in low-risk, short-term assets, such as money market deposits, government bonds, and bank bills. They offer stable, albeit relatively low, returns.
Fixed interest or bond funds: These funds typically invest in low-risk assets, such as government bonds, bank bills, and mortgage-backed securities. Some funds may also invest in corporate bonds, which carry higher risks.
Mortgage funds: These funds invest in property loans (mortgages). The risk associated with these funds depends on the quality of the borrowers and the purpose of the loan. Investors receive income as long as borrowers pay interest, but their investment value may fall if borrowers cannot repay their loans.
Property funds: These funds invest in residential, commercial, or development properties. Some property funds can be high-risk, and investors may not be able to withdraw their funds on short notice. They also do not offer a fixed rate of interest or return.
Share (equity) funds: These funds invest in listed companies in Australia, overseas, or both. They offer the potential for higher returns but also have higher risks.
Alternative investment funds: These funds include hedge funds and those that invest in private equity, derivatives, and commodities. They carry high risks, and investors should seek financial advice before investing.
Mixed asset or multi-sector managed funds invest in a diverse range of assets and are categorized based on the types of investments that comprise the majority of their portfolio. There are four types of investment mix:
Growth: 85% of funds invest in shares and property, the rest invest in cash or fixed interest
Balance: 70% of funds invest in shares and property, the rest in cash or fixed interest
Conservative: 30% of funds invest in shares and property, the rest in cash or fixed interest
Cash: 100% in cash or cash-equivalents. This includes short-term money market deposits, government bonds and bank bills
Check the PDS and look at long-term returns
A Product Disclosure Statement (PDS) provides essential information on a fund's investment assets, fees, risks, target returns, and complaint procedures. Comparing a fund's long-term returns (over 5 to 10 years) against index funds and similar funds is recommended to gauge its future performance.
Review the Risks
Each managed fund has different risks depending on the assets they invest in, which can be found in the PDS. It is important to be aware of different risk factors, such as misleading fund labels, illiquid assets, and indirect investments in other managed funds.
Check the managed fund fees
Managed funds charge various fees for managing your investments, and it is important to check them before investing. These fees include establishment fees, contribution fees, management fees, performance fees, adviser service fees, and transactional fees. These fees can significantly impact your returns, and they are deducted from your account balance regardless of whether the fund makes a profit or loss. It is advisable to compare the fees of different managed funds and negotiate with the fund manager or adviser to reduce the fees.
Buying units or shares in managed funds
When investing in a managed fund, you are purchasing units or shares which are determined by the unit or share price at the time of investment. The price changes based on the value of the assets the fund invests in, and there is usually a minimum investment amount required. Managed funds can be either unlisted or listed. With unlisted, funds are bought through an application form or mFund service. While listed, funds bought and sold on an exchange, such as the ASX. The share price of listed funds may differ from the net asset value (NAV) of the fund.
Withdrawing your money from a managed fund
Managed funds may have fees or restrictions on when you can withdraw your money. Some funds may have a lock-in period, where you cannot withdraw your money until a certain point in time, such as 12 months after your investment. Others may freeze or stop withdrawals temporarily to protect all the members' investments. If you face difficulty withdrawing your money beyond the stated fund restrictions, you can file a complaint.
If an investor finds it difficult to pay their bills and their money is in a frozen fund, they may be able to withdraw some or all of them.
Keep track of your managed fund’s performance
It's important to monitor the performance of your managed fund regularly. The fund manager is required by law to provide performance updates at least once every 12 months. Review the performance reports carefully to evaluate how your investment is performing and to determine if it's still aligned with your financial objectives.
Source: https://moneysmart.gov.au/managed-funds-and-etfs/choosing-a-managed-fund