Managed Funds - Definition, Types, Advantages & Disadvantages

A managed fund is an investment vehicle where multiple investors contribute money into a single fund. This fund is then professionally managed by a fund manager, whose responsibility is to invest the pooled funds in various assets based on the fund's investment strategy and objectives. The assets managed in these funds can include stocks, bonds, real estate, commodities, and other financial instruments.

The primary advantage of managed funds is that they allow individual investors to access a diversified portfolio of assets, which can help reduce the risk of investment. Since the fund manager is typically a professional with expertise in the markets, investors benefit from the manager’s knowledge, experience, and ability to make investment decisions on their behalf.

How Do Managed Funds Work?

When you invest in a managed fund, your money is pooled together with that of other investors. The fund manager is responsible for deciding how the money will be allocated across various asset classes. This might include equities (stocks), fixed-income securities (bonds), real estate, and other investment vehicles.

Key Features of Managed Funds:

Diversification: Managed funds invest in a range of assets, ensuring that the investment is not overly reliant on the performance of any single asset. Diversification helps in reducing overall risk.

Professional Management: The fund manager makes decisions about what assets to buy or sell based on their research and market knowledge. This takes the burden off individual investors who may not have the expertise to make these decisions themselves.

Liquidity: Managed funds allow investors to buy or sell their units relatively easily (though this depends on whether the fund is listed or unlisted). Listed managed funds can be traded on the stock exchange, providing liquidity for investors.

Fees: Fund managers charge fees for their services. These fees may include an annual management fee (usually a percentage of the funds under management) and performance fees based on the returns generated by the fund. It's essential to understand the fee structure before investing in a managed fund.

Types of Managed Funds

Managed funds come in various forms, each offering different benefits and catering to specific investor needs. The most common types of managed funds include:

1. Unit Trusts

A unit trust is one of the most common types of managed funds. In a unit trust, investors pool their money together to create a larger fund. The manager of the fund invests this pool of capital in a range of assets according to the fund's objectives.

Each investor owns "units" in the trust, which represent their proportionate share of the fund. The value of each unit fluctuates based on the performance of the underlying assets in the fund. Unit trusts typically offer a diversified portfolio and can be either actively managed (where the fund manager makes investment decisions) or passively managed (where the fund tracks a specific index).

2. Superannuation Funds

A superannuation fund is a type of managed investment fund used to accumulate savings for retirement. In many countries, such as Australia, contributing to a superannuation fund is mandatory, with employers required to make contributions on behalf of their employees.

Superannuation funds often invest in a broad range of asset classes to grow the fund over time. These funds may also offer a variety of investment options, from conservative (e.g., bonds and cash) to more aggressive options (e.g., equities).

3. Group Investment Funds (GIFs)

Group Investment Funds (GIFs) are similar to unit trusts in that they pool the money of multiple investors. However, GIFs may not always offer the same level of regulation or protection as unit trusts. The main advantage of GIFs is that they allow investors to combine their buying power, which can result in lower fees and access to larger-scale investments.

GIFs are usually managed by a professional fund manager and are typically used for longer-term investments.

4. Insurance Bonds (Investment Bonds)

An insurance bond, also known as an investment bond, is a type of managed fund offered by life insurance companies. These bonds are long-term investments where the investor commits their money for a set period, typically 8 to 10 years. The fund manager invests the pooled money in a diversified portfolio of assets, and the bond grows over time.

Insurance bonds are typically designed to offer tax-efficient returns and are often used for medium- to long-term wealth accumulation. They may offer death benefits or other life insurance components, making them attractive for certain investors.

Advantages of Managed Funds

Diversification: By pooling funds, managed funds invest in a broad range of assets, reducing the overall risk for individual investors. This helps mitigate the impact of poor performance from any single asset in the portfolio.

Professional Management: Fund managers bring expertise to the table, allowing investors to benefit from their market knowledge and investment strategies. This is especially valuable for those who lack the time or expertise to manage investments on their own.

Access to Larger Investments: Managed funds typically have the buying power to invest in large-scale, diverse portfolios that individual investors may not be able to access on their own, such as institutional-grade bonds, real estate, or international stocks.

Liquidity: Many managed funds are liquid, meaning investors can buy or sell their units relatively easily. For example, listed funds can be traded on stock exchanges like regular stocks.

Reduced Costs: By pooling funds, investors benefit from economies of scale, which can lower transaction costs and management fees compared to managing investments individually.

Disadvantages of Managed Funds

Fees: While the fund manager’s expertise comes with significant benefits, it also comes at a cost. Fund management fees can erode the returns of the fund, especially if the fees are high. It's important for investors to assess the fee structure of the fund before investing.

Lack of Control: When you invest in a managed fund, you are handing over control of the investment decisions to the fund manager. This means you cannot directly control which assets are bought or sold within the fund.

Tax Implications: The tax treatment of returns from managed funds can vary. For example, distributions may be taxable, depending on the fund's structure. It's important to consider the tax implications before investing.

Performance Risk: While fund managers are professionals, they do not guarantee returns. The value of a managed fund is subject to market risks, and the manager's decisions may not always result in positive returns.

Conclusion

Managed funds are an excellent option for investors seeking a diversified portfolio of assets but lacking the time, resources, or expertise to manage their own investments. They offer professional management, reduced risk through diversification, and the potential for strong returns. However, they also come with fees and other risks that investors need to carefully consider before committing capital.

Whether you are considering a unit trust, a superannuation fund, or an insurance bond, managed funds provide access to a variety of investment strategies and opportunities. It's essential to choose the right type of managed fund based on your investment goals, risk tolerance, and time horizon to maximize the potential benefits.