Aug 12

Direct investments vs managed funds

Direct investments vs managed funds

You can choose to invest directly in the financial markets or via a managed fund.

Direct investments
> Made directly into the market such as the share market or property.
> Generally requires large amounts of money, a degree of market knowledge, and the time and skill to regularly monitor market trends and relevant tax and legislative changes.

Managed fund
> Allows you to pool your money with that of other investors.
> Let the experts manage your investment, monitor economic and legislative changes that affect your money.
> The fund manager can look after most of the administrative requirements associated with your investment.

What makes managed funds so attractive?

1. You can start small
To invest in a managed fund, you need a smaller amount of money (as little as $1,000) to gain exposure to the various sectors of the market and dozens of individual stocks.
One of the keys to investing successfully is investing on a regular basis. Setting aside as little as $100 a month can add up to a substantial sum when you invest it regularly for longer periods of time. You can choose small monthly or weekly amounts and transfer your payments on the day you get paid.

2. It is an easy way to diversify your investments
The beauty of managed funds is that you can access different asset classes, companies, industries, sectors and countries with a relatively small amount of money. Investing directly requires large sums of money to gain this range of exposure.

3. It is a cost effective way to invest
Investing directly into shares or property comes at a cost. Expenses such as brokerage, stamp duty and agents fees can have a significant effect on the value of your investment.
Managed funds allow you to access certain investments at a fraction of the usual cost. This is because you share these costs with other members of the fund, rather than having to pay the minimum investment fee on your own.

4. Experts manage your money
Your investment will be managed by professionals who have the education and skill to make appropriate investment decisions. These experts have access to investment research and information not easily available to individual investors.

5. You don’t need to sell an entire house to access your money
You can generally access your money within five to ten days after making a request. Accessing capital in direct investments, particularly property, can be very difficult, costly and time consuming. Managed funds have a major advantage over direct property investments, in that you don’t have to sell the whole investment to access some capital.

What types of managed funds are available?
There are five asset classes you can invest in: cash, fixed interest, property, Australian shares and international shares. Each has its own level of risk as well as a potential return. Managed funds can be used as a means to invest in any one (or a combination) of these assets. The types of managed funds include:

Capital guaranteed
• This type of fund guarantees that the capital you have invested will not fall in value.
• These funds tend to be heavily weighted in cash and fixed interest type investments.
• Investors will generally pay a fee or premium for the guarantee over their investment.

Cash and fixed interest
• These funds usually invest in securities (i.e. bills and bonds) issued by financial institutions including banks, Government and semi-Government authorities.
• Cash funds are suitable for short-term liquidity requirements and emergency needs, while fixed interest funds are good as a source of regular interest income.
• These funds focus on generating an income stream with lower risk of capital loss.
• They are sometimes known as ‘defensive’ funds.

Capital stable funds
• The majority of the money in a capital stable fund is invested via cash and fixed interest. A smaller proportion is usually held in shares and property to provide some growth within the fund.

Balanced funds
• Invest across the entire spectrum of asset classes, usually weighted towards growth assets.
• These funds are generally subject to a higher level of volatility than defensive funds yet long-term performance is expected to be higher.

Growth funds
• These funds focus on long term capital growth rather than income and are generally suited to people who don’t need to access their money for at least five years.

Sector specific funds
• These funds generally invest in only one asset class, with a small holding of cash to meet liquidity requirements.
• As these funds allow an investor to be ‘overweight’ in an asset class there is the potential to achieve a higher level of return and in-turn, experience a higher level of volatility.