Managed funds combine the capital of several investors to build diverse portfolios that include equities, real estate, and fixed income instruments, among other asset classes. This investment approach effectively solves one of the biggest challenges individual investors face—accessing professional fund management without needing substantial capital.
When investing in a managed fund, investors don’t own the underlying assets directly; instead, they purchase units in the fund itself. These units fluctuate in value in tandem with the underlying assets, potentially generating returns through both capital appreciation and income distributions. For Australian investors, managed funds offer a practical way to diversify investments while benefiting from professional management expertise.
Throughout this guide, readers will learn about managed funds, their operation in Australia, the various types available, and how to select the right fund based on personal investment goals. Additionally, the article will explore essential considerations, such as costs, risks, and accessibility, equipping beginner and experienced investors with the knowledge neccesary to make informed investment decisions.
What is a Managed Fund and How Does It Work?
In the Australian financial landscape, a managed fund serves as an investment vehicle that consolidates money from numerous investors into a collective pool. This structure allows individuals with similar investment objectives to participate without requiring substantial capital outlay.
Definition of a Managed Fund in Australia
A managed fund in Australia operates as a pooled investment where a professional fund manager oversees the money on behalf of all investors. The fund manager purchases assets in either a single asset class (e.g., property) or across multiple asset classes, including shares, property, fixed interest and cash. Furthermore, a managed fund exhibits three key characteristics: investors contribute money to acquire rights to benefits, contributions are pooled for a common purpose, and members do not control day-to-day operations.
Unlike direct investments, when participating in a managed fund, investors receive ‘units’ representing their proportional share rather than owning the underlying assets directly. These units function as a measurement of ownership, with each unit having equal value that fluctuates based on market conditions.
How Unit Pricing and NAV Affect Your Returns
The Net Asset Value (NAV) represents the market value of the fund’s assets at any given point. Unit prices are determined by dividing the total market value of assets (less liabilities) by the total number of units in circulation. Consequently, unit prices rise and fall in tandem with the value of the underlying investments.
When investing AUD 76,449.51 in a fund with a unit price of AUD 1.53, an investor would receive 50,000 units. Later, if the unit price increases to AUD 1.77, the investment value grows proportionally. This pricing mechanism ensures fair treatment among different generations of unit holders.
Income vs Capital Growth in Managed Funds
Managed funds generate returns through two primary channels:
- Income: Derived from earnings such as share dividends, rental income from properties, or interest from cash investments (minus costs).
- Capital growth: Results from increased valuation of hard assets like property or rising market values of liquid assets such as shares.
Income-focused funds aim to provide a regular cash flow, making them particularly appealing to retirees or those needing steady income streams. Conversely, growth-oriented funds prioritise increasing the underlying asset value, typically suited for younger investors with longer investment horizons.
The decision to focus on income or capital growth ultimately depends on individual financial goals, risk tolerance, and investment timeframe.
Types of Managed Funds in Australia
Australian investors face numerous options when selecting managed funds, with each type offering distinct risk-return profiles and investment approaches.
Single Asset Funds: Shares, Bonds, Property, Cash
Single asset funds focus on one specific asset class. Cash funds invest in low-risk, short-term investments, such as government bonds and bank bills, offering stability but lower returns. Fixed-interest or bond funds typically invest in low-risk loan investments, although higher-risk options are also available. Property funds invest in commercial, retail, or residential real estate, with potentially higher returns but also higher risk and possible withdrawal restrictions. Share (equity) funds invest in listed companies, both domestically and internationally, offering higher potential returns but also corresponding higher risk.
Multi-Sector Funds: Growth, Balanced, Conservative
Multi-sector funds combine various asset classes in different proportions based on risk profiles:
- Growth funds typically allocate around 85% to growth assets (shares, property) with the remainder in defensive assets
- Balanced funds generally invest about 70% in growth assets and 30% in defensive assets
- Conservative funds focus more on stability, with approximately 30% in growth assets and 70% in defensive assets
These allocations enable investors to match their risk tolerance with suitable investment strategies.
Listed vs Unlisted Managed Funds
Unlisted managed funds—the most common type—require direct application to the fund manager. Their units are priced based directly on Net Asset Value (NAV). Conversely, listed funds trade on exchanges like the ASX, with prices potentially varying from NAV due to market sentiment. Moreover, listed funds offer higher liquidity through daily trading, whereas unlisted funds may restrict withdrawals, especially those focused on properties.
Actively Managed vs Index (passive) Funds
Investment managers working for actively managed funds choose securities with the goal of outperforming market benchmarks. These funds typically charge higher fees (0.5% to 1.5%) for this expertise. In contrast, index funds passively track market indices with minimal trading, resulting in lower fees (ranging from 0.03% to 0.2%). Despite the higher costs, historical data show that approximately 85% of active stock fund managers and bond fund managers have underperformed their benchmarks over five-year periods.
How to Choose the Right Managed Fund?
Selecting the right managed fund requires careful research and consideration of several critical factors. The decision should never be based solely on recent performance figures or catchy marketing.
Reading and Comparing Product Disclosure Statements (PDS)
The Product Disclosure Statement serves as the primary document for evaluating any managed fund. A PDS outlines key features, fees, commissions, benefits, risks, and the complaints process. Furthermore, it provides essential information about the fund’s investment objective, management team, and investment philosophy. Before committing to any investment, thoroughly reviewing this document is crucial for making informed comparisons between different funds.
Risk Profile and Investment Goals
Risk profiles typically range across four categories: conservative, balanced, growth, and high growth. Your tolerance for risk significantly influences which fund aligns with your needs. Conservative investors accept lower returns for higher capital stability, whilst high-growth investors tolerate substantial volatility for potentially greater returns. Accordingly, the chosen fund’s investment strategy should match both your risk profile and investment timeframe.
Evaluating Long-term Performance vs Benchmarks
Compared to short-term results, a fund’s success over a period of five to ten years is a more reliable indicator of its future performance. When evaluating performance, compare the fund against both relevant market indices (like the ASX200) and similar competing funds. This comparison helps determine whether the fund is delivering appropriate value relative to its risk level and investment approach.
Assessing Fund Manager Experience and Strategy
The fund manager stands at the heart of the investment process, making critical decisions about asset allocation. Consider their experience, track record (particularly through varying market conditions), investment philosophy, and risk management practices. An adept fund manager with a well-defined and consistent investment strategy can have a significant impact on the fund’s performance.
Using Fund Screeners and Comparison Tools
Fund screeners allow investors to filter and compare funds based on parameters such as risk level, historical returns, fees, and investment categories. These tools save time by presenting filtered information within seconds and offering side-by-side comparisons. Many financial websites offer free access to these valuable resources, enabling investors to make more informed and objective comparisons.
Costs, Risks and Accessing Your Investment
Understanding the cost structure of managed funds is crucial, as even minor percentage differences can have a significant impact on long-term returns.
Management, Performance and Entry/Exit Fees
The fee structure of managed funds in Australia typically includes several components. Management fees range from 0.5% to 2.5% of the asset value and are deducted regardless of fund performance. Performance fees are applied when fund managers fail to meet benchmarks. Initially, investors may encounter entry fees (ranging from 0% to 5% of deposits) and later exit fees (ranging from 0% to 5% of withdrawals). The buy/sell spread represents transaction costs rather than manager profit.
Liquidity and Withdrawal Restrictions in Property Funds
Liquidity refers to the ease with which investments can be converted into cash. Notably, unlisted property funds often lock investor money for approximately five years. Subsequently, economic uncertainty has led many property funds to modify redemption terms. These restrictions are outlined in Fund Constitutions and Product Disclosure Statements, primarily to ensure fair treatment of all investors during market volatility.
Volatility, Inflation and Currency Risks
Managed funds face three significant risks. Volatility risk involves frequent value fluctuations. Inflation risk occurs when investments fail to keep pace with rising prices. For international investments, currency fluctuations can enhance or erode returns. According to financial experts, hedging strategies using forwards, options, and futures help mitigate currency exposure.
Hardship Withdrawals From Frozen Funds
A frozen fund has suspended members’ withdrawal rights. Nevertheless, investors experiencing financial hardship may access their money. Qualifying criteria include urgent financial hardship, unemployment lasting more than three months, compassionate grounds, or permanent incapacity. Approved investors can withdraw up to AUD 152,899.02 per calendar year with a maximum of four withdrawals annually.
Tracking Fund Performance Through Annual Reports
Fund managers are required to provide performance updates at least once a year. Effective monitoring involves reviewing semi-annual and annual reports, checking distributions, and comparing against benchmarks. Above all, avoid panic-selling during market downturns. Online tools from platforms like Morningstar help investors compare funds against similar offerings.
Conclusion – Managed Funds
Managed funds provide Australian investors with a pathway to diversified portfolios, eliminating the need for substantial capital or expert knowledge. Throughout this guide, we have explored the fundamental mechanics of these investment vehicles, from unit pricing calculations to the various ways they generate returns through income and capital growth.
Accordingly, investors now understand the distinct categories available—single-asset funds focusing on specific markets, multi-sector options providing preset diversification, and the choice between listed and unlisted structures. The contrast between actively managed and passive index funds presents another critical decision point, particularly considering that approximately 85% of active managers have historically underperformed their benchmarks over five-year periods.
The potential risks, including market volatility, inflation erosion, and currency fluctuations, demand careful consideration before committing capital. Nevertheless, regular performance tracking through annual reports enables investors to make timely adjustments when necessary. Above all, managed funds represent a practical investment approach that balances professional expertise with accessibility for everyday Australians. The journey from beginner to informed investor ultimately rests on understanding these fundamental principles and applying them to personal investment strategies.
What are the main types of managed funds available in Australia?
There are several types of managed funds in Australia, including single-asset funds (focusing on shares, bonds, property, or cash), multi-sector funds (such as growth, balanced, and conservative), and both listed and unlisted funds. Additionally, investors can choose between actively managed funds and passive index funds.
How do unit pricing and Net Asset Value (NAV) affect returns in managed funds?
The market value of all assets (less liabilities) is divided by the quantity of units in circulation to determine unit prices. As the value of underlying investments changes, so does the unit price. This mechanism ensures that returns are proportionally distributed among all investors based on their unit holdings.
What fees should I be aware of when investing in managed funds?
Common fees include management fees (typically ranging from 0.5% to 2.5% of the asset value), performance fees for exceeding benchmarks, entry fees (ranging from 0% to 5% of deposits), and exit fees (ranging from 0% to 5% of withdrawals). There’s also a buy/sell spread representing transaction costs. It’s crucial to understand these fees as they can significantly impact long-term returns.
How can I select the right managed fund to achieve my investment goals?
To select the right managed fund, consider your risk profile and investment goals. Carefully read the Product Disclosure Statement (PDS), evaluate the fund’s long-term performance against benchmarks, assess the fund manager’s experience and strategy, and utilise fund comparison tools. It’s essential to consider more than just recent performance and marketing materials when making your decision.