What is a managed fund & how do they work?

Investing in the stock market can be a good way of storing wealth. However, most working-age adults don’t have the time to research individual companies and consistently pick winners. That’s why a lot of retail investors will generally opt for a managed fund. 

These professionally managed funds have been used by investors for decades and are one of the many options Australians have to choose from from when it comes to investing in property or the stock market.

A managed fund is a big pool of investor money that is used to buy assets like stocks, bonds, cash, or even property. Whether a fund consists of one or more assets is dependent on the fund and the fund manager, so it’s always good for buyers to check they’re getting the fund that they are looking for.

Managed funds are generally made up of hundreds and even thousands of investors. In turn, the fund is usually managed by a fund manager. However, funds will vary how active or passive they are which, in turn, can affect things like fees and returns. 

1. Diversification

One of the biggest advantages of Managed funds is that they give investors exposure to a wide range of stocks or assets that they may not have been to due to the costs. This can be useful when a long view is taken as a wide range of industries for stocks or asset types (stocks, bonds, etc.) can help grow wealth over the long term through diversification.

2. Managed by a professional

Most retail investors are just trying to preserve their long-term wealth. Generally, they can’t dedicate a lot of time to researching individual companies. So, one of the benefits of a managed fund is that an investor can essentially leverage the skills of someone experienced in investing.

2. Risk adjustment

Managed funds often offer a range of risk-adjusted portfolios. These can range from high growth but risky, balanced, and low risk with low return. This is good for individual investors as risk tolerance will vary with age and needs.

1. Larger initial investment

On the other hand, managed funds may require a large initial investment. This could be the standard $500 (similar to buying ASX shares), or it could be one set by the fund manager with some as high as $25,000. However, some managed funds have low or no minimum when investing further funds.

2. Fees

Actively managed funds will tend to have higher fees due to the administrative costs. Over the long term, fees can mean a huge difference in portfolio growth as they divert potentially invested cash away. Remember, If the managed fund is passive (i.e. fixed to an index like the s&p 500), then it will generally have lower fees. However, passive funds will move with an index, meaning that they don’t have the potential to outperform the market like an active fund can.

3. Winners and losers

Unfortunately, the nature of buying a wide range of assets means that there will be some that underperform. Part of the diversification strategy, however, is to offset those losses with some winners that do outperform. 

Managed funds and ETFs are similar in function. What differs between the two is where they are bought and sold. Managed funds are not listed on a stock exchange and are generally bought and sold directly from the fund (usually on their website). This is why they are referred to as unlisted assets. 

On the other hand, ETFs (exchange-traded funds) are usually traded on exchanges such as the ASX or the NYSE. In this sense, buying an ETF is like buying shares that own shares. 

Since ETFs can be traded on an exchange through a brokerage platform, they can be easier to buy and sell for investors who already have a trading account. Plus, ASX-listed ETFs come with CHESS sponsorship (on platforms that support it), so investors get direct ownership of their stake. 

Looking to start trading ETFs and shares? Check out some of the brokerage platforms in the table below.