What is a managed fund? Should you invest in it?

Summary

  • A managed fund is a registered managed investment scheme that pools together investors’ money to invest in various securities.
  • A professional money manager operates the fund on behalf of all investors.
  • The primary benefit of investing via a managed fund is that small or retail investors access professionally managed portfolios.

A managed fund is a registered managed investment scheme that pools together investors’ money to invest in securities like stocks, bonds, money market instruments, and other assets. A professional money manager operates the fund on behalf of all investors.

The primary benefit of investing via a managed fund is that small or retail investors access professionally managed portfolios of equities, bonds, and other securities. Otherwise, they may not have been able to access such a structured investment portfolio of domestic and global stocks independently.

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How does a managed fund work?

A managed fund is a type of a trust that assigns its investors’ units proportionate to the amount of money invested. A managed fund is an open-ended fund, implying that new units are created as new investors join the fund and cancel as they redeem. It should be noted that investors do not own the fund’s underlying investment, but only the units.

The value of the fund’s units increases and decreases relative to the value of underlying assets.  Thus, the performance of a managed fund is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.

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There are a few funds that also pay income of distributions. Every unit holder participates proportionally in the fund’s gains or losses.

The managed funds also charge some expenses, namely annual fees or, in some cases, commissions. The expense ratios can have an impact on the overall returns of the fund.

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Different roles performed in a managed fund

Different entities perform a variety of roles in a managed fund. The significant roles performed in a managed fund include:

Responsible entity

A responsible entity performs a like a trustee of a trust. A responsible entity supervises the fund’s operations and monitors its investments and market performance.  In addition, the entity is responsible to ensure that the fund pays its operating costs and tax. The entity could also perform the role of the fund’s investment manager. The responsible entity can also appoint a third-party manager.

Investment manager

Investment managers have a role to select and manage the assets of managed funds. The fund can be managed by one person, two people as co-managers, or by a team of three or more people.

Custodian

A custodian is defined as an independent financial institution whose role is to hold the fund’s underlying investments. They also keep a check on financial frauds.

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Types of managed funds

Single-asset managed funds – These funds invest in a single-asset class such as shares, property, or bonds. Further sub-types include cash funds, fixed interest or bind funds, mortgage funds, property funds, share funds and alternative investment funds.

Mixed-asset managed funds – These funds invest in a range of assets. They are labelled based on the types (growth, balanced and conservative) of investments, which make up most of the fund portfolio.

Should you invest in a managed fund?

  • Investors can access different Australian and international asset classes, combinations of asset classes, and various investment styles.
  • Investors also get access to the expertise of professional fund managers.
  • The regular flow of information provided by investment manager can help investors to develop their investment strategies.
  • Investors can diversify their investment through managed funds as they can invest in a range of Australian or international companies.
  • Investors do not need to worry about their investments as the decision are made by the investment manager.

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Investors should also review the risks

According to experts, investors should thoroughly revive the risks involved in investing in a managed fund. Each managed fund has a different risk based on the assets in which they invest in. There may be a probability that an investor may lose some or all the money invested due to market-related risks.

Rising interest rates can lower the value of the funds. There is also a risk of losing purchasing power due to inflation. The fall in the exchange rate can also lower your actual gains.

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