60-second guide: Managed funds

Managed funds pool together the money of individual investors and use it to buy assets such as Australian or international shares, bonds, property or cash. Different funds have different objectives so it's important to assess whether they match your own objectives from the outset.

Part of their appeal is the fact that you can leave the buying and selling decisions to the manager of the fund, whose job it is to use your money to generate positive returns.

You can invest in both actively managed funds, where the manager selects the stocks based on their own convictions, and passively managed funds, which tend to be lower cost and aim only to match the performance of a benchmark, rather than beat it.

For example, exchange traded funds (ETFs) are usually passively managed.

Investing in managed funds

When you invest in a managed fund, you hold units in the fund. For example, an investment of $5,000 at a unit price of $1 gets you 5,000 units.

The unit price, or value of each unit, reflects the market value of the assets held within the fund at any given time. As such, your units can appreciate or depreciate daily in accordance with the rise and fall of the assets’ market values.

Apart from capital growth — when the unit price increases — you may earn income in the form of dividends or interest when the fund makes profits from its assets.

Your fund manager will pay you the income (often called “distributions”) according to a specific schedule and you may have the options of receiving cash or reinvesting your income into the fund. Reinvesting in the fund allows you to own additional units without having to put in more money.

Benefits

A managed fund can provide you access to different companies, industries and even countries.

Since you're sharing the investments with other unit holders, the entry cost tends to be lower than buying shares directly. You may also be able to make additional contributions on a regular basis without being charged.

The fact that the pooled capital is usually spread across different investments can help mitigate the risk of certain assets performing poorly.

In addition, it may be beneficial to rely on a professional fund manager to look after your money if you don't have the time, knowledge or skills to make informed investment decisions.

Disadvantages

There are fees involved when investing in a managed fund, as you are hiring the service of the fund manager to produce returns on your investment.

The amount of fees can vary greatly and can have a significant impact on your overall returns.

Just like any other form of investment, managed funds are exposed to different levels of risk. It's vital to determine your investment goals and understand your risk appetite before investing.

It's also important to recognise that actively managed funds do not always outperform the benchmarks that they aim to beat and you could lose money by investing in them.