WHAT ARE MANAGED FUNDS?
When you invest 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 according to the rules set out for each fund and each investor owns a proportion of the total fund. You can invest in a single fund or a mix of funds.
Investing in managed funds spreads your money across different kinds of investments and your overall investment objectives will determine what type of managed fund(s) suit you.
Managed funds are generally described as having one of the following investment objectives:
RETURNS VS RISK
Unlike a bank term deposit, the return you get from a managed fund will go up and down over time, depending on what it’s investing in.
Growth’ or ‘aggressive’ funds investing in higher-risk assets such as shares and property may go up and down in value in the shorter term, but over time they typically provide a higher overall return. ‘Defensive’, ‘conservative’ or ‘balanced’ funds mostly invest in lower-risk assets such as bonds and cash. They are likely to have more stable values and returns but not likely to grow as much over the long term.
HOW TO ASSESS YOUR RETURNS
One way to assess return is to compare it to a relevant benchmark. With managed funds, the fund manager chooses a market index to act as a benchmark. An active fund aims to beat the market index return, but they don’t always manage to achieve that goal. A passive fund simply tracks a market index.
Buying managed funds instead of individual securities spreads risk and requires less work than investing directly.
HOW DO MANAGED FUNDS WORK?
Once you have invested into a managed fund, your money is pooled together with other investors. The fund manager then decides where the money is invested according to the fund’s strategy. Of particular importance to a managed fund is its price. The price of a managed fund is known as the net asset value (NAV).
WHAT DO I OWN?
Managed fund investors do not own the securities in which the fund invests; all the investments (for example, shares in companies and bonds) are owned by the managed fund. Instead, as an investor in the managed fund, you own shares in the fund itself. You can then sell these shares when you decide to cash out and take profits.
There are many advantages for investing
in Managed Funds
Simple investment process
You don’t need to pick what shares to invest in. Instead, you pick a fund and deposit the amount of money you want to invest.
Managed funds invest in dozens of different assets such as shares and bonds, so if one company underperforms, the other investments can make up for this.
Affordable initial deposits
The minimum investment is a smaller more manageable amount.
Fund managers are obligated by financial markets law to send their investors fund updates, audited accounts and performance data. You will also have a client services team who can answer questions about the fund.
Tax is taken care of
We as the fund manager remits PAYE back to the IRD based on your IRD, so you don’t need to do anything.
Managed funds have a set fee, so you won’t pay more than an agreed percentage of your investment per year, even if the managers incurred more costs running the fund (i.e. in times of market volatility).
Things to consider before investing
in Managed Funds
Your investment value can drop
This is true of most investments (other than term deposits with an A-rated bank), and not a specific negative feature of managed funds. It’s just something to be aware of.
You don’t have any input into investing decisions
When you choose a fund, the fund managers invests based on research or agreed objectives. You won’t be able to suggest investment opportunities.
The fees can be high even if the returns are low
If you pay a 1.50% p.a. management fee for an after-fee return of 3% p.a., you may feel like you received poor value for money. Fund managers and their investors make more money and are happier when funds perform above expectations, and vice versa.