The Investor’s Guide to Managed Funds in the Australian Stock Market

Investing in the stock market can be a complex endeavour, especially for those who are new to the field. Managed funds offer a convenient and professionally managed way to invest in a diversified portfolio of assets. This guide will provide an in-depth understanding of managed funds, their types, how to evaluate them, and the risks and benefits involved, specifically tailored for the Australian stock market, covering investments ranging from shares to property and more.

What is a Managed Fund?

A managed fund is an investment vehicle where your money is pooled together with that of other investors. A professional fund manager then uses this collective pool of money to buy and sell assets, such as cash, shares, bonds, and listed property trusts, on behalf of the investors. Instead of owning the underlying investments directly, investors own 'units' in the fund or 'shares' in the managed investment scheme.

Managed funds are designed to provide investors with access to a diversified portfolio that they might not be able to achieve on their own. This diversification can help spread risk and potentially enhance returns. Managed funds can vary significantly in terms of investment strategies, asset classes, and risk levels.

Types of Managed Funds

There are thousands of managed funds available in the Australian market, catering to different investment needs and preferences. Managed funds can be broadly categorized into single-asset funds and mixed-asset funds.

Single Asset Managed Funds

Single asset-managed funds invest in a specific type of asset. Examples include:

• Share Funds: These funds invest in a portfolio of shares from various companies. They can focus on domestic shares, international shares, or a combination of both.

• Property Funds: These funds invest in real estate assets or listed property trusts, providing exposure to the property market.

• Bond Funds: These funds invest in fixed-income securities such as government and corporate bonds, offering regular income and lower risk compared to share funds.

Mixed Asset or Multi-Sector Managed Funds

Mixed asset or multi-sector managed funds invest in a range of asset classes, providing diversified exposure. Examples include:

• Growth Funds: These funds aim for capital growth by investing in assets expected to appreciate over time, such as shares and property.

• Balanced Funds: These funds aim for a balance between growth and income by investing in a mix of shares, bonds, and property.

• Conservative Funds: These funds focus on preserving capital and generating income by investing primarily in bonds and cash.

• Cash Funds: These funds invest in short-term money market instruments, offering high liquidity and low risk.

Evaluating a Managed Fund

Evaluating a managed fund involves examining various factors to determine if it aligns with your investment goals and risk tolerance.

Check the Product Disclosure Statement (PDS)

The Product Disclosure Statement (PDS) provides essential information about the fund, including its investment mix, fees, risks, and objectives. Reviewing the PDS can help you understand the fund's strategy and how it fits into your overall investment plan.

Look at Long-Term Returns

Examining a fund’s long-term returns, typically over 5 to 10 years, can give you a better indication of its performance. While past performance is not a guarantee of future performance, consistent long-term returns can suggest effective management and strategy.

Review the Risks

Every managed fund comes with risks, which can vary based on the assets they invest in. Common risks include market volatility, economic downturns, and interest rate changes. Understanding these risks and how they may impact your investment is crucial.

Check the Fees

Managed fund fees can significantly impact your returns. Common fees include management fees, performance fees, and entry/exit fees. It’s important to compare these fees across different funds to ensure you are getting value for your money.

Net Asset Value (NAV) and Its Importance

The Net Asset Value (NAV) of a managed fund is calculated by taking the total value of the fund’s assets and subtracting its liabilities. The NAV is crucial because it determines the unit price of the fund. Understanding the NAV helps in making informed investment decisions and assessing the fair value of the fund’s units.

Investing in Unlisted Managed Funds

Unlisted managed funds are not traded on a stock exchange, making them less accessible to individual investors compared to listed funds. Investing in unlisted managed funds often requires the assistance of a financial adviser or consultant.

Diversification Benefits

Unlisted managed funds can provide significant diversification benefits by offering access to a wide range of asset classes that might not be available through listed funds. These can include private equity, infrastructure, and specialized sector funds.

Professional Advice

Due to the complexities and less transparent nature of unlisted managed funds, seeking advice from a financial adviser or consultant is advisable. They can help you understand the fund’s structure, performance, and risks, ensuring it aligns with your investment goals.

Managing Your Managed Fund Investment

Once you have invested in a managed fund, it is important to actively manage your investment to ensure it continues to meet your financial objectives.

Keep Track of Performance

Managed fund performance is typically updated at least once every 12 months. Regularly reviewing these performance reports is essential to understand how your fund is performing and whether any adjustments are needed.

Seek Professional Advice

Consider seeking the advice of a financial adviser or consultant to help manage your investment. They can provide valuable insights and recommendations based on market conditions and your personal financial situation.

Risks and Challenges in Managed Fund Investing

Investing in managed funds comes with its own set of risks and challenges. Understanding these risks can help you make informed decisions and manage your investment more effectively.

Market Risk

Managed funds are exposed to market risk, which is the possibility of losing some or all of your investment due to market fluctuations. Market risk is influenced by various factors, including economic conditions, political events, and changes in interest rates.

Management Risk

Management risk is the risk associated with the fund manager's decisions. Poor investment decisions or changes in the management team can negatively impact the fund’s performance. It’s important to choose a fund managed by experienced and reputable professionals.

Liquidity Risk

Liquidity risk is the risk that the fund may not be able to sell its assets quickly enough to meet redemption requests. This can be a concern for funds investing in less liquid assets, such as real estate or private equity.

Currency Risk

For managed funds investing in international assets, currency risk is a significant factor. Fluctuations in exchange rates can affect the value of the investments and impact returns.

Tax Implications

Managed funds can have complex tax implications, including capital gains tax and income tax. It’s important to understand these implications and how they affect your overall investment returns.

Conclusion

Managed funds offer a convenient and professionally managed way to access a diversified portfolio of local and global stocks. By understanding the different types of managed funds, evaluating a fund’s performance, and managing your investment effectively, you can make informed decisions on your investment journey.

Whether you’re a seasoned investor or just starting out, managed funds can be a valuable addition to your investment strategy. They provide access to a wide range of asset classes, professional management, and the potential for significant returns. However, it is crucial to understand the associated risks and conduct thorough research before investing.

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