Choosing a managed fund

How to pick a managed fund

There are thousands of managed funds you can invest in, so choosing the right one can be a challenge.

Here we provide tips on how to choose a fund that meets your needs, explain common fees and charges, and show you how to buy units and keep track of the fund's performance.

Types of managed funds

Managed funds come in all shapes and sizes and it is important to understand the differences so you can choose a fund that suits your needs.

Single asset or mixed asset managed funds

Funds differ in the types of assets they invest in. There are funds that invest in:

  • A single asset class, such as shares or bonds
  • A mixed asset option, such as a balanced or growth fund, which contains a mix of different asset classes.

Single asset managed funds

Here are some of the single asset class managed funds to choose from:

  • Cash funds - Typically low-risk, short-term investments that can include cash or cash equivalents, such as the short-term money market deposits, short-term government bonds and bank bills.
  • Fixed interest and bonds - Like cash, these are typically low-risk, short-term investments. They can include government bonds, bank bills, or mortgage-backed securities.
  • Mortgages - Mortgage funds generally invest in property loans. The risks of these funds vary greatly depending on the borrower and the purpose of the loan. You receive income as long as the borrower pays their interest. Interest is generally higher than bank deposit interest, but it is also riskier. Your investment does not increase in value and it may decrease if borrowers cannot repay their loans and the property cannot be sold for a good price.
  • Shares - Shares or 'equity' in listed companies in Australia, overseas or both. These funds offer the potential for high returns but with higher risk.
  • Property - Residential, industrial and commercial properties or property developments. You might not be able to withdraw from the fund at short notice; however, this is easier if the property trust is listed. You are not guaranteed a fixed rate of interest or return of your capital. 

Mixed asset managed funds

Funds that invest in different types of asset classes, also called multi-sector funds, are labelled according to the types of investments that make up the majority of the portfolio. Different funds use different labels so always check the product disclosure statement (PDS) to see which asset classes the fund is invested in.

Your investment options

Here are the typical investment characteristics of different types of investments options.

Different funds may have different names for their portfolios and asset allocations may not be the same as ours. Read the fund's PDS to find out how money will be allocated for each investment option.

Investment mix Typical characteristics

Growth

darkblue-legend Around 85% in shares and property
lightblue-legend The rest in cash or fixed interest

Growth-piechart

Investment: $10,000 after 5 years = $12,800

Expected return: 5.0%
(gross returns before fees and taxes)

Volatility: High volatility-high

Expect a loss: 4-5 years in 20

Balanced

darkblue-legend Around 70% in shares and property
lightblue-legend The rest in cash or fixed interest

Balanced-piechart

Investment: $10,000 after 5 years = $12,600

Expected return: 4.8%
(gross returns before fees and taxes)

Volatility: Medium volatility-low

Expect a loss: 3 years in 20

Conservative

darkblue-legend Around 30% in shares and property
lightblue-legend The rest in cash or fixed interest

Conservative-piechart

Investment: $10,000 after 5 years = $12,100

Expected return: 3.8%
(gross returns before fees and taxes)

Volatility: Low volatility-low

Expect a loss: 1 year in 20

Cash

darkblue-legend 100% in deposits with Australian deposit-taking institutions

Cash-piechart

Investment: $10,000 after 5 years = $11,400

Expected return: 2.7%
(gross returns before fees and taxes)

Volatility: Very low volatility-low

Expect a loss: 0 years in 20

* The expected returns are based on actuarial advice received in May 2018. Actual returns can vary significantly from year to year and could be negative in some years, particularly for investment mixes where more is invested in shares and property.

Listed and unlisted managed funds

Traditionally, managed funds were unlisted investments, purchased by applying to a particular fund. Most funds still operate in this way, but you can now purchase some unlisted managed funds through the Australian Securities Exchange's (ASX) mFund service.

You can also now buy listed managed funds on an exchange, such as the ASX. The ASX offers four types of listed managed funds:

  • Listed investment companies (LICs) and listed investment trusts (LITs)
  • A-REITs (Australian real estate investment trusts)
  • Infrastructure funds
  • Absolute return funds.

Find out more about ASX listed managed funds

Things to consider before investing in a managed fund

Risk and investment timeframe

Now that you have an idea of what you can invest in, you should consider:

  • what returns you need to achieve your goals
  • over what timeframe you will invest
  • the level of risk you are comfortable with.

When investing, the higher the expected return, the higher the risk. Find out more about risk and return

Diversifying your investments also reduces your risk and helps smooth out short-term ups and downs in returns. Find out more about diversification.

Look at long-term performance of managed funds

If a fund performs well in one year, this is no guarantee it will do just as well the next year. A fund's performance over 5 to 7 years gives you a better indication of how it will perform in the future. You can also compare the performance of the managed fund against an index fund to see if it is keeping pace with the relevant market.

Indicators of a good fund include an above average 5 to 7 year return and a high fund rating. Morningstar's Fund Screener tool allows you to search for funds based on selected criteria.

Managed fund fees

Funds charge a range of fees for managing your money. Small differences in fees can have a large impact on your returns in the long run. Below is a list of some common fees.

  • Entry fee - Also known as an initial contribution or up-front fee. This is usually between 1% and 5% and will reduce the amount of your initial investment. If you deal directly through the fund or use a discount broker, you may not have to pay an entry fee or it may be rebated back to you. If you use an adviser, you may be able to negotiate this fee.
  • Contribution fee - Similar to an entry fee and charged on each additional contribution you make to the fund. This fee may also be negotiable.
  • Management Expense Ratio (MER) - This is an ongoing fee to cover the cost of managing your investment. It is typically between 0.5% and 2.5% per year, depending on the investment option you choose, and will be deducted from your account balance. Funds offering a nil entry fee option will usually charge higher MERs for customers who don't pay an entry fee. This could cost you a lot more in the long run.
  • Performance fee - This is an extra fee the fund manager may charge if the investment return is better than the benchmark or target return.
  • Adviser service fee - An ongoing fee paid to your adviser for providing advice and arranging your investments. Typically, between 1 to 2% per year, your adviser may be prepared to negotiate on this fee.

Once you have found a couple of funds you like, use the managed funds calculator to compare the fees and performance of each fund.

Compare managed funds and the impact of fees over time.

Managed funds fee calculator

 

Buying units in a managed fund 

When you invest in a managed fund you are buying 'units' in the fund. The number of units you get depends on the unit price at the time you invest. Units are of equal value and the unit price will reflect the value of the fund's assets, which may change daily.

Typically, you will need at least $5,000 to invest, although some funds will let you get started with as little as $1,000.

You can buy units directly from the fund manager or from an online broker. If you want to buy units from the fund manager you'll need to complete an application form, which is usually found at the back of the fund's PDS or may be available on the fund's website.

Check your withdrawal rights

Before you invest, check if there are any fees or restrictions on withdrawing from the fund. For example, there may be penalties for withdrawing your money within the first 3 years.

Smart tip

Read the fund's PDS before you buy units. If you have any questions contact a licensed financial adviser or the fund manager.

Listed funds can be bought or sold on a market like the ASX through a stockbroker, similar to the way you buy and sell shares. However, the sale price might not always reflect the underlying value of the fund's assets.

Frozen funds

Unlisted managed funds might impose conditions on your withdrawal rights. For example, they might freeze withdrawals if they don't have enough cash to pay them. If lots of other investors want their money back at the same time as you, there might be a limit on the number of units you can cash out. Some unlisted funds do not allow you to get your money back at all until a certain point in time.

If the fund you're invested in is frozen and you're finding it hard to pay your regular bills, you may be able to cash in some of your units under a hardship category. The responsible entity of your managed fund must apply to ASIC before they can give you hardship relief. Contact your fund to find out whether ASIC has allowed them to give hardship relief. 

You would generally only be able to receive a hardship payment in one of the following situations:

  • You cannot meet reasonable and immediate family living expense
  • On compassionate grounds (for example, medical costs for serious illness, funeral expenses, to prevent foreclosure)
  • You have suffered permanent incapacity.

Speak to your managed fund to find out the details about the freeze.

See ASIC's information for investors in frozen funds (INFO 111) for more information.

Keep track of your managed fund's performance

By law, your fund manager must update you on your investment at least once every 12 months. Read performance reports and statements carefully to understand how your investment is performing and whether it continues to meet your objectives.

Critically assess the performance information provided by the fund manager. They may only be comparing the performance of your fund to similar funds, and not the market generally.

There are a number of independent research providers who can provide comparison information about managed fund performance, or you can ask a licensed financial adviser.

Make sure you receive all correspondence from the fund manager about your investments. Your financial planner might offer to receive and look after this correspondence for you; but, if you agree to this, you might miss important information and effectively lose control over your investments. The risk of fraud is also higher.

There are thousands of managed funds available, so choose one that reflects your risk tolerance, investment timeframe and interests. Do some research so that you are comfortable with your choice before committing yourself.


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Last updated: 21 May 2019