Owning units within a managed fund has benefits over directly owning the underlying investments. Mainly:
Diversification
By investing into a range of investments a managed fund is able to reduce volatility risks of investing in an asset class by using the pooling of investments to invest into numerous investments. For example a fund investing in Australian Equities typically invests into 30-200 different stocks spreading the risks of a single share price plummeting. Investors would need a sizeable fund to have this level of diversification within their own portfolio.
Cost
Unless you have a large amount of money to invest, costs are likely to be considerably lower within a managed fund. Purchasing a $1000 parcel of shares with a typical cost of $25-$50 is costing you 2.5%-5% to buy and 2.5%-5% to sell, that’s a 5%-10% drop in the value of your portfolio before you have even started. A fund manager can trade for as little as 0.05% or less.
Aside from trading costs, employing your own full time fund manager would be astronomical; a traditional managed fund allows you to access professional fund managers whilst pooling the cost among the other investors.
Professional management
It is perfectly normal to want to invest when investment returns have been good and cash in your investment when returns have been poor. Unfortunately, if this is due to movements in the market rather than poor investment decisions this is probably the worst time to invest and cash in your investments.
Professional managers specialise in making informed investment decisions to get the best possible return whilst ensuring they follow their prescribed investment strategy*. This allows you to try and achieve the best returns for your portfolio without the emotional roller coaster impacting on their day to day investment decisions.
Hiring a professional on an individual basis can be a costly exercise. By using a typical managed fund, you are able to access high quality investment professionals for an annual management fee. You may just prefer the peace of mind that someone is making the investment decisions on your behalf.
Easier to Invest Into
Many investors find managed funds an easier alternative to managing their own investment portfolio on a day to day basis. Whilst researching which individual stocks to buy and sell can be a very satisfying and for some, a lucrative hobby, it can quickly become a full time job (particularly for larger portfolios) and individual investors will not be able to match the resources available to professional managers in making investment decisions. Investors may also feel it easier to buy and sell or just manage a portfolio of managed funds.
Since investor attitude to risk can vary, a fund manager sets out their investment strategy at outset. This allows you to pick and choose investments to fit in with the level of risk you wish to take or even a sector you may wish to invest into such as investments in China or Technology funds.
Each managed fund has an investment objective which is described in the fund’s prospectus. It is the fund manager’s role to achieve the best possible returns whilst following this investment strategy. For example if a manager’s objective is to invest in Australian equities with a minimum of 85% in Australian equities and he feels the market is going to fall, his objective is to achieve the best possible return, leaving a minimum of 85% in Australian equities. He cannot switch all his holdings out of the market.
There are always investors who feel Australian equities are a good investment and so the fund manager’s strategy has to follow what he is paid to do. How would you feel if you had chosen to invest in an Australian Equities fund only to find out the fund manager has taken a gamble on US technology shares. After all, you always have the freedom to switch to a different managed fund if you feel that sector is underperforming.
If you’re not sure what the investment strategies for your fund are, read your prospectus, the fund objectives are always stated in these.
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Alternatively, if you’re unsure which managed fund would be suitable to you, our predefined portfolios are a good place to start!
