Five things you need to know about managed funds
Even with a 4% drop over the year to December 2022, there is still a colossal amount of money tied up in the Australian managed funds sector: a touch over $3 trillion in total funds under management (Australian sourced) according to Rainmaker Information.
So what keeps drawing investors, and such a significant amount of money, to managed funds?
Peter Hogg, head of advice, experience and enhancements at Aware Super, says that managed funds can provide a relatively low-cost option for people looking to set themselves up for retirement or work towards a specific savings goal.
"When you invest in a managed fund you get access to a pool of funds that other investors have invested, and you get a professional manager that can make investment decisions on your behalf.
"And managers can make decisions on when the right time is to buy, what the right type of shares are to own, when the right time to sell is, and all of those sort of things."
That's the potential attraction, but what else should investors without any experience in the world of managed funds know about them before diving in?
Let's delve into four common questions, and consider what may be worth looking for in a fund.
1. What assets do managed funds invest in?
There are thousands of managed funds from hundreds of investment managers available for Australians to invest in, but broadly, managed funds are a type of investment where money from a range of investors is pooled together and managed by an investment expert (a fund manager).
Because there are so many options to choose from, Hogg says that it can be difficult for investors to home in on a fund that will suit them.
One way to narrow that search down is by looking at the type of asset classes the fund is investing in. And in the retail fund space, that can mean looking at either diversified or single sector funds.
"Diversified managed funds are where you've got an investment manager who is investing in a wide range of assets. So they might have some Australian shares, some international shares, some property, some cash, fixed interest and different things," explains Hogg.
"You also have single sector managed funds where you might just be investing in a particular investment class, like Australian shares, or international shares, or just in cash or bonds.
"So there are many different types, and depending on the manager you're using and your investment objectives, that will give you the investments that you're after."
2. What kind of fees do managed funds charge?
Like all investments there can be a range of fees attached to a managed fund including everything from an establishment fee for creating the account, to management fees for managing the investment and performance fees which can be charged if the fund exceeds certain expectations.
As Hogg explains, the cost associated with a particular managed fund is often displayed as a percentage in the form of a total expense ratio or management expense ratio (MER).
"When you invest in a managed fund you'll typically pay a management expense ratio.
Now again, depending on the complexity of the fund you're investing in or the type of assets that that manager is buying and selling and investing on your behalf, that fee usually ranges from 0.5% of the assets you've got invested up to about 2%.
"Typically what we see when we're working with clients is that managed fund costs are around 1-1.5%, and, if you're working with an advisor like Aware, we charge you fees for the advice we provide, but there's no additional commissions or different things that play out with the managed funds itself."
While it may seem like a relatively small percentage of the total amount invested, the difference between fees can have a substantial impact over time.
For example, the Moneysmart managed funds fee calculator shows that on an initial $20,000 investment followed by contributions of $200 each month, and assuming an average return of 7%, the gap between a 1.5% p.a. fee and a 1% p.a. fee would be $5,780 over 15 years.
3. Do managed funds require a minimum investment?
"Every managed fund is a little bit different and have their own different rules, but typically we see that around $5,000 is the minimum starting investment. That means many investors can probably get access to this diversified way of investing in a relatively low cost way," says Hogg.
Beyond that initial investment though, investors may also be able to make smaller, regular investments into the fund along the way in order to build their investment.
"A lot of managed funds will give you the option of actually doing regular savings plans, you know, maybe a couple of hundred dollars a month which allows you to make use of compound interest and save for your future in a really easy, affordable way," Hogg says.
4. Is there a difference between managed funds and ETFs?
When most people think about managed funds they're likely thinking of retail funds which are actively managed by a fund manager and are unlisted - which means that in order to invest in them, investors are required to buy units of that fund.
Given that exchange-traded funds (ETFs) are also a type of investment which rely on the pooling of money from various investors, they are also often considered a type of managed fund too. As the name implies, ETFs can be purchased and sold on exchanges like the ASX.
As Hogg explains though, there are certainly distinctions between retail managed funds and ETFs.
"So typically, the main difference between the two is that managed funds are active - you actually employ the manager to make investment decisions on your behalf and you're outsourcing all those investment decisions to a professional."
"Whereas ETFs - and this is not always the case - are generally more passive in their nature. So sometimes they can be slightly lower-cost in terms of the way that they operate, but you're actually just tracking indexes or tracking particular sectors as opposed to paying for that professional management."
5. What should you look for in a managed fund?
At the end of the day, choosing to invest money into a particular managed fund will be a personal decision based on your own investment goals - perhaps with the guidance of a financial advisor. But broadly, Hogg says there are a few elements worth considering when comparing different funds.
- Fees: "The cost of the managed fund is obviously an important one, but when you're paying for that professional management you sometimes get what you pay for. So it's important that there's a balanced view of that."
- Assets: "Obviously the type of investment and assets that the managed fund is invested in is also important, whether it be a single sector or diversified portfolio."
- Performance: "Clearly you'd want to look at a fund that has a good track record though, of course, previous returns aren't indicative of future performance. But a fund that has a good history of performance and invests in the way that you want is something that we believe in really strongly at Aware."
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