A MANAGED fund does not exactly inspire people. In the excitement stakes, it ranks right up there with income tax legislation and public service reform.

But despite their dull image and chequered history in recent years, managed funds can be a valuable wealth-building tool and millions of Australians already own them through their super funds.

It’s an $882 billion industry with thousands of investment options, so getting started can be a daunting choice for beginners. Here’s how you do it:

WHAT ARE THEY?

Managed funds have a few mistaken identities, but put simply, they are an investment portfolio built and run by a professional investment manager.

"Investors purchase units in the fund which gives them a share of the ownership of the fund," says Macquarie Private Wealth head of research Riccardo Briganti.

"A change in the value of the underlying investments in the fund is reflected in a change in the unit price," he says.
Wealth For Life Financial Planning principal Rex Whitford says the funds invest in many different assets or countries and regions.

"Managed funds are an excellent way to gain a well-diversified exposure across the sector that the fund invests in with only a small amount of money," he says.

DECISIONS, DECISIONS

The choice of investment options is limited only by fund managers’ imaginations. You can invest in a basic Aussie share fund or a complex overseas fund that focuses on one sector or country, bonds, property, infrastructure, commodities and much more.

Independent research group Morningstar’s editorial and communications manager, Phillip Gray, says there are almost 10,000 managed funds in Australia.

He says the sector’s growth has been largely driven by compulsory super over the past 20 years.

Gray says beginners should ask themselves several questions.

"Write down your goals and what you are trying to achieve from the investment," he says.

"That will help guide you in terms of the kind of fund you are looking for."

Other questions are:

• What is my time frame?
• How good am I at coping with volatility that is, sharp rises and falls in my investment’s value?
• Do I need to preserve my capital?
• How will I buy and sell my managed funds?

HOW TO BUY AND SELL

Investors often go through an adviser when buying and selling managed funds, but they can also deal directly with fund managers or even use online stockbrokers such as CommSec, E*Trade or Westpac Broking.

Impact Financial Coaching director Allan Ward says investing is quite simple.

New investors should read the fund’s product disclosure statement (PDS), usually available from a financial adviser or online, but don’t expect to understand all the jargon within it.

"The PDS will set out the service standards around time frames for deposits and redemptions," Ward says.

"You complete an application form and write out a cheque, direct credit or BPAY to the fund manager to buy units in the fund.

"To sell, most fund managers require written instructions.

"Money can go to you via a bank account or as a cheque.

"Some fund managers will act on verbal instructions they’ll record the phone call if they have your bank account details on file."

Unlike the immediacy of share purchases, it can take several days for managed fund transactions to be processed, depending on the complexity of the fund.

CONTROL OR DIVERSIFY?

Ward says investors lose a degree of control in managed funds but this might not be a bad thing.

"If you invest directly into shares, you’ll probably have a more concentrated portfolio and incur more transaction costs. But at least you know what you’re invested in," he says.

"In a managed fund you could be invested across 50-100 companies. This provides a better level of diversification.

If you want to do it yourself you need to ask yourself whether you’re confident you can achieve better performance on your own than a team of investment professionals can."

WATCH THE FEES

Morningstar’s Gray says there are a few key fees to understand.

First is the ongoing management fee, which can vary dramatically.

For a typical Australian share fund, this management fee is about 1.8 per cent per year of your investment and covers the cost of running the fund including salaries and administration.

Gray says an overseas share fund or property fund may charge 2 per cent or more, while funds that simply track a share market index may be as low as 0.2 per cent a year.

Entry fees and exit fees have been a controversial cost over the years, but have become less prominent in recent times.

"A financial planner will often rebate back to you the full or almost all of the upfront fee," Gray says.

Performance fees are a growing source of fee income, and may gobble up a big chunk of your fund’s outperformance over a particular stock index or benchmark.

They can even apply if your fund has a negative return but still does better than its peers.

"Performance fees are now widespread, particularly if you want to invest with a boutique fund manager or small-cap fund manager," Gray says.

New financial advice rules to start in July ban ongoing trailing commissions for advisers for new investments, but they don’t apply to existing managed fund investments, so investors should first do their homework.

"One of the best ways to accumulate wealth over time is to keep your fees low," Gray says.

TRAPS FOR BEGINNERS

Most experts say investors should not buy into a managed fund based on past performance, as one year’s top performer can often deliver poor results the following year.

Macquarie’s Briganti says people who buy international funds should understand they may be taking on currency risk.

"For example, if international markets increase by 10 per cent but the Australian dollar appreciates by 10 per cent, the return on the fund will be zero," he says.

Ward says people should avoid investing just before June 30. "Most funds pay out a high distribution at this time which includes any realised capital gains," he says.

"Even if you’re invested just for a single day, you’ll get the full distribution and the unit price will drop accordingly."
Lack of tax control over capital gains and income is a key drawback of managed funds compared with direct investments in shares, cash and property. Investors with large fund holdings may be hit with an unexpected capital gains tax liability or taxable income that they had not budgeted for.

Whitford says people should avoid funds that invest in the latest fad or bubble.

"These funds were plentiful during the dotcom bubble and were heavily promoted just prior to the crash that followed. These were a fantastic marketing success for the funds but a disaster for the investor," he says.

HOW LONG TO INVEST?

It depends on when you’ll need access to your money. Whitford suggests those with a one or two-year time frame should seek a good cash management fund, for two to three years perhaps a fixed interest or mortgage fund, while share and property funds are best for those with a seven to 20-year time frame.

Ward says fund managers usually disclose the suggested time frame for each fund in their PDS.
"Personally, I recommend people have at least a five-year time horizon for the conservative funds and at least seven years for the growth funds," he says.

By Anthony Keane

(Source: http://www.news.com.au)