Understanding Managed Funds
Managed funds are one of the most common ways investors can invest their money. Managed funds come in many forms, each with a different investment focus and objective. Understanding the different types can help to better interpret how these investments operate.
Types of managed funds
Single asset class funds
These funds focus on one type of investment, such as Australian shares, international shares, property or fixed interest. They are often used by investors who want targeted exposure to a specific asset class.
Multi-asset or diversified funds
These funds invest across multiple asset classes, such as shares, bonds, property and cash. The goal is to spread investments across different areas to manage risk and smooth returns over time. Diversified funds may be labelled according to risk profiles, such as conservative, balanced, growth or high growth, depending on their allocation to growth assets. This is often the way superannuation investments are structured.
Index funds
Index funds aim to replicate the performance of a particular market index, such as the ASX 200 or global share indices. Rather than trying to outperform the market, they aim to match market returns by holding a similar mix of investments to the index they track.
Actively managed funds
These funds aim to outperform the market through research, analysis and active decision-making by professional fund managers. The manager selects investments based on their outlook for markets, industries and individual companies.
Each of these fund types plays a different role in investment markets, and their performance will vary depending on economic conditions and market cycles.
How managed funds are structured
Most managed funds in Australia operate under a unit trust structure. Investors purchase units in the trust, and the fund manager invests the pooled money according to the fund’s investment objectives.
The unit price of a managed fund is generally calculated based on the total value of the fund’s assets minus its liabilities, divided by the number of units on issue. This pricing process helps ensure fairness between investors entering and exiting the fund.
Fees and costs
Managed funds incur fees that cover the costs of managing and administering the investment. These fees can vary between funds and may affect overall returns over time.
Management fees
This is the ongoing cost paid to the investment manager for overseeing the fund. It is typically expressed as a percentage of the total funds under management.
Performance fees
Some actively managed funds charge a performance fee if returns exceed a specified benchmark. This fee is designed to reward managers for strong performance but can also increase total investment costs.
Buy-sell spreads
A buy-sell spread may apply when entering or exiting a fund. This covers transaction costs associated with buying and selling underlying assets and helps ensure existing investors are not disadvantaged by others entering or leaving the fund.
Understanding fees is important because even small differences in costs can have a noticeable impact on returns over long periods.
Tax considerations
Managed funds can generate taxable income, even if distributions are reinvested rather than paid out in cash.
Distributions may include:
Dividends from shares
Interest income
Capital gains from asset sales
Other forms of income
Tax treatment depends on individual circumstances and current tax laws. Investors typically receive an annual tax statement from the fund detailing the components of distributions for reporting purposes when investing as an individual.
Liquidity and access
Liquidity refers to how easily an investment can be converted into cash. Most managed funds allow investors to redeem units on a regular basis, depending on the fund’s structure and the assets it holds.
Funds investing in highly liquid assets, such as listed shares, tend to process withdrawals more quickly. However, funds investing in less liquid assets, such as direct property or infrastructure, may have longer withdrawal timeframes or restrictions during certain market conditions.
Understanding liquidity is an important aspect of how managed funds operate and can influence how investors experience market fluctuations.
The role of managed funds in superannuation
Managed funds are widely used within superannuation because they provide access to diversified investments and professional management. Superannuation members often invest in managed funds without realising it, as many default super options are constructed using a range of managed funds.
This structure allows superannuation funds to access different investment managers, asset classes and strategies, helping to spread risk and improve diversification for their members.
Market movements and investor behaviour
Market volatility is a normal part of investing. Managed funds that invest in growth assets will experience periods of rising and falling values.
Investor behaviour during these periods can influence outcomes. History has shown that reacting emotionally to short-term market movements may lead to decisions that do not align with long-term investment principles. Managed funds are generally designed with a longer-term focus in mind, allowing time for markets to recover from downturns.
Environmental, social and governance (ESG) considerations
Many managed funds now incorporate environmental, social and governance factors into their investment processes. These funds may avoid certain industries, focus on sustainable business practices or actively engage with companies on governance matters.
The approach to ESG investing varies widely between funds, and disclosure documents typically outline how these considerations are applied.
Understanding fund documentation
Before investing in a managed fund, investors are typically provided with detailed documentation outlining how the fund operates.
Key documents include:
Product Disclosure Statement (PDS)
Target Market Determination (TMD)
Fund fact sheets and performance reports
These materials explain the fund’s objectives, risks, fees, investment strategy and asset allocation. They also help investors understand what to expect in different market conditions.
Common misconceptions about managed funds
There are several common misunderstandings surrounding managed funds.
One is that diversification eliminates risk entirely. While diversification can reduce the impact of poor performance in a single investment, it cannot remove market risk altogether.
Another misconception is that professional management guarantees better returns. While fund managers aim to achieve strong results, performance can vary depending on market conditions and investment strategies.
Finally, some investors assume managed funds are only suitable for large amounts of money. In reality, many funds allow relatively small minimum investments, making them accessible to a broad range of investors.
Final thoughts
Managed funds play a significant role in modern investing by providing access to diversified portfolios, professional management and a wide range of asset classes. Like all investments, they involve risks and potential rewards, and their performance will vary over time depending on economic and market conditions.
Understanding how managed funds operate, including their structures, fees, risks and return characteristics, can help investors develop a clearer picture of how they function within the broader investment landscape.
FAQs
What is a managed fund?
A managed fund pools money from multiple investors to invest in assets such as shares, property, bonds or cash, managed by a professional investment manager.
Are managed funds high risk?
Risk levels vary depending on the assets held. Funds with higher exposure to shares and property tend to experience more volatility than those invested in cash or fixed interest.
How do managed funds make money?
Returns come from increases in asset values and income such as dividends, interest and capital gains.
What fees do managed funds charge?
Managed funds may include management fees, performance fees and transaction costs, which can vary depending on the fund.
About Us
After working as an advisor for a decade, Joel founded Unified Wealth.
Unified Wealth specialises in helping clients who are facing life’s big decisions.
Whether you’re contemplating your first property, growing your family or starting your investment journey we can help you focus on the simple steps to help you make your goals reality.
Our priority is making sure you have all the right information available to make the best possible decisions for you and those you love.
Our company values are:
Unity - We are most effective when we work together as a team
Trust - We are trustworthy and act in your best interests
Transparency - We are honest and communicate openly
Education - We are committed to lifelong education
At Unified Wealth our team is highly experienced and provides goal-based advice and solutions for a range of advice strategies.
Speak to our team today.
DisclosureThe information in this blog and the links has been prepared for general information purposes only and does not take into account your personal objectives, financial situation or needs. It is not intended to provide commercial, financial, investment, accounting, tax or legal advice. You should, before you make any decision regarding any information, strategies, or products mentioned in this website, consult a professional financial advisor to consider whether it is suitable and appropriate for you and your personal needs and circumstances. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product, together with the Target Market Determination (TMD)