If you’re looking for an investment opportunity but want less hassle and risk than owning individual shares, a managed fund could be right for you.
What is a managed fund?
A managed fund pools money from different investors, which can then be invested by a fund manager across a range of assets.
Investing in a managed fund gives you access, not only to the New Zealand market, but overseas markets, including Australia, Asia, Europe and the United States.
You can invest in either a single-asset fund, a fund of mixed assets (including shares, commercial property, bonds and cash), in a specific sector, or broader option like an ethical company fund.
Making a gain or loss on your investment depends on the unit price of your fund which can go up or go down every day depending on the value of the underlying assets. You can also increase or decrease the value of your investment by buying or selling units.
One of the advantages of a managed fund is that it allows you to set up a regular monthly payment to buy units, and you can just sit back and let your investment grow.
What type of managed funds are there?
There are lots of different types of funds to suit all different types of investors. Which fund you invest in depends on your risk appetite, your timeframe for investing and what kind of returns you want to make.
For example, if you want your money to remain relatively steady in the short term, it may not be sensible to invest in a managed fund with a high proportion of shares.
At the other end of the spectrum, if you’re looking for a high return, choose a fund mainly consisting of growth assets.
The 5 common risk profiles of managed funds:
- Defensive Fund. Lowest growth but less risk short term. These have limited exposure to growth assets like shares and property and rely more on steady cash-like investments.
- Conservative Fund. Willing to take on some risk for average returns.
- Balanced Fund. OK with some ups and downs for mid-range long term returns.
- Growth Fund. May be suitable if you want higher growth over the long term and are ok with dips in balance.
- Aggressive Fund. May be the choice for you if you want strong long term growth and are comfortable with market volatility. An aggressive fund will have higher exposure to growth assets, such as shares, and less to income assets.
What are the benefits?
- Easy to use. Managed funds are an easy way to invest money and earn capital gains without buying individual shares. With a managed fund you can lower the risk by spreading your money across more assets.
- Small initial amount. Many managed funds only require a small starting balance of $500 making them ideal for beginner investors to get started. Making regular payments will also grow your fund over time as will reinvesting your six-monthly dividends.
- Hands off. Admin duties like taxes are taken care of for you by the fund manager and you’ll receive regular reports on how the fund is doing.
What are the risks?
- No guarantees. Although you can control the type of fund you invest in, there is still a risk that the price of a fund will drop and you won’t get the return you expected.
- High fees. The various management and administration fees charged by a fund, if too high, can eat into your profits.
- Can’t pick and choose your investments. Investment decisions are at the whim of the fund manager. Though they still have to manage the fund in accordance with the rules, you don’t have a say over the manager’s decisions.
How do I invest in a managed fund?
You can get started through an investment company, bank, or one of the growing number of digital platforms that offer investment funds.
If you’re unsure about what to invest in then it’s important to do your homework or speak to a professional before investing.
Talking to a fund manager or financial advisor about your age and stage, your risk profile, investing timeframe and personal circumstances can be helpful, as well as doing your own online research about investment options, the performance of funds, and fees charged.
Questions to ask before investing in managed funds
Always carefully review a fund’s product disclosure statement, annual report and quarterly update before you invest in a managed fund. Ask yourself the following questions when reviewing a fund to help figure out if it’s right for you:
- What are my investment goals?
- What is my investment time frame? 3-5 years, 5-10 years?
- What level of risk can I handle?
- What assets is the fund invested in?
- What are the administration and management fees?
- How has the fund performed over the last 3-10 years?
How are managed funds different from ETFs?
Another type of investment to consider is Exchange Traded Funds (ETFs) which can be a simple and affordable way of investing.
An ETF is a low-cost investment fund that can be traded on a stock exchange such as the New Zealand Stock Exchange (NZX). Funds are created by ETF issuers and fund managers and consist of a basket of securities such as shares and bonds.
What’s a PIE fund?
A portfolio investment entity (PIE) fund is a type of managed fund that can give you tax advantages.
PIE funds tax your income at your prescribed investor rate (PIR). Your PIR is based on your last two years of income and capped at 28%, so even if your marginal tax rate is 33%, you’ll only pay 28% tax.
Which companies and platforms offer managed funds?
There are a wide variety of companies offering managed funds in New Zealand, as well as platforms, these are just a few to consider:
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