What Are Managed Funds and How Do They Work?

If you have always heard about them, but are still wondering what is a managed fund, we are going to walk you through the pros and cons of this method of investing. 

At its core, a managed fund is a way for investors to pool together their money, and by using an experienced fund manager, can take advantage of investment opportunities that might be difficult or even impossible to access as individuals. 

Managed Fund Definition and Types

There are many types of managed funds, but in their most basic form are not too different from normal investment avenues, just on a larger scale as members pool their funds. 

The most popular types of managed funds include equity funds where you invest in shares, fixed-income funds which invest in company or government bonds, and real estate funds which invest in commercial or industrial properties. 

These managed funds can vary in structure so it is important to know which one will best serve your goals. Unit trusts are set up like other trusts, and you become a beneficiary proportional to your investment, whereas managed investment schemes are similar to unit trusts but are regulated by the Corporations Act, and all assets are owned by the fund manager. 

A mutual fund, or what is typically just referred to as a managed fund, is a basic pool where you get ‘units’ based on your investment, and when the fund managed sells the assets you get a share based on the number of units you hold. 

There are also balanced funds that aim to use a mixture of the above in order to diversify the portfolio and mitigate risk.

How Does a Managed Fund Work?

Managed funds require a minimum buy-in, often as low as $1,000, which gives you a set number of shares, or ‘units’. Your funds will be pooled with other investors’ funds, and a fund manager or team such as Melbourne Finance & Equity Group will then invest in a diverse range of assets based on their expertise and the pool’s buying power. 

The fund manager will actively manage your assets in order to reduce risk and create as much value for the pool as possible, either by diversifying the investment or buying and selling to extract profit where possible. 

The Role of a Fund Manager

Selecting the right managed fund comes down to finding an experienced and trustworthy fund manager, as they will be the person selecting and managing the assets that get invested in, and overseeing the performance of the pool’s investments. 

The fund manager will keep a close eye on various markets to find good investment opportunities, some of which are only available if you have very large buying power. Risk mitigation strategies are also key here, and a good fund manager will aim to diversify your investment to address any potential risk and protect the fund from potential losses. 

Benefits of Investing in Managed Funds

There are many benefits to investing in managed funds, the biggest of which surrounds the increased buying power you get by pooling funds and creating a larger lump sum. 

Managed funds let you access the benefits of diversification without the large spending, with most managed funds requiring very low minimum investments to get started. This can also give you access to broader markets, or international investments that are difficult for individuals to access. 

One of the biggest advantages of managed funds is the fund manager and the team that will look after your investments. By trusting your money to an experienced team, you’re greatly reducing your exposure to risk and increasing the likelihood of potential profits, while the fund manager takes care of the difficult tasks for you.

Risks Involved in Managed Funds

Like any investment, there are risks that can affect how profitable the investments can be. The largest of these is market volatility; something that no fund manager can control, however, a well-managed fund will diversify its investments in order to reduce potential risk exposure. Another risk is that management fees can eat into your profits, so you’ll want to do your research and find the right fund for you.

A drawback to investing with managed funds is you won’t have control over the individual investment choices, you will have to rely on the decisions made by the fund manager. This can be a benefit if your fund manager is experienced and closely monitors the markets, however, risk can arise if this is not the case. 

How to Invest in a Managed Fund

The most important step when deciding to invest in a managed fund is research. Selecting the right fund is vital to success, so do notrush the process and make sure you have checked all the options available within your budget. This is an opportunity for you to learn about the fund’s investment strategies, and how they manage risk, as well as how much is required as a minimum investment. 

There are many ways to take the step to invest in a managed fund, depending on how active you want to be with the process. You can contact a fund manager directly, like Melbourne Finance & Equity Group, and put in an application or discuss avenues to invest. Another option is to contact a financial advisor who can help you find and apply to managed funds. 

Some managed funds are listed on the stock exchange and offer online platforms for you to purchase units in their fund, such as the big banks. Or you could see if your superannuation fund has an option to allocate a portion of your super to a managed fund - there are many options, so it is important to take your time and research what fits best with your goals.

FAQs about Managed Funds

What is the minimum investment for a managed fund?

This can wildly vary based on the fund manager, and also the type of fund you invest in, however some funds require only a $1,000 minimum. The best bet is to contact us and find out your options.

How are returns distributed in managed funds?

There are two main options for accessing the returns from your investment, which are either to reinvest your gains to increase the number of units you hold, or to receive the income directly and ‘cash out’. 

What fees are involved in managed funds?

Standard fees to expect when investing in a managed fund include establishment and withdrawal fees, management fees, and if the fund outperforms its targets, some funds will charge performance fees.