A managed fund lets you hand investment decisions to a fund manager.
How a managed fund works
In a managed fund, money from many investors is pooled and invested to match the fund’s investment strategy. The strategies can range from lower-risk cash funds to higher-risk share and property funds. A managed fund can be a simple way to buy a mix of investments in one product.
A fund manager makes investment decisions. The company that legally operates the fund is called the responsible entity or fund operator.
When you invest in a managed fund, you don’t own the underlying investments directly. Instead, you own a stake in the fund. The value of the fund can go up or down. Some funds also pay you income, called distributions.
Some managed funds are bought and sold on an exchange like the ASX. These can include exchange-traded funds, or ETFs. For more, read Exchange-traded funds (ETFs).
If you have super, it is likely you already invest in managed funds.
Managed funds go by different names. You may see terms like unit trust, mutual fund, managed investment scheme, or Corporate Collective Investment Vehicle (CCIV).
Types of managed funds
Managed funds differ in two main ways: what they invest in and how those investments are chosen.
What managed funds invest in
Single asset managed funds
These funds invest in one asset class. An asset class is a group of similar investments.
Cash funds – invest in very low-risk, short-term investments like bank deposits and short-term government bonds. They are low risk, but returns are usually lower too.
Fixed interest or bond funds – invest in loans to governments and companies. They can hold higher risk loans that pay more interest.
Private credit funds – invest in loans that are not publicly traded. Risk and return depend on the borrowers and how the loans are structured. These can be higher risk.
Mortgage funds – invest in property loans. They can pay income so long as their borrowers keep paying. They can fall in value if borrowers default.
Property funds – invest in property or property-related assets. Some are higher risk.
Share (equity) funds – invest in shares in Australian or overseas companies. They can offer higher returns. Their value can also swing more sharply.
Alternative investment funds – include hedge funds, private equity, derivatives and commodities. These can be higher risk and more complex.
Mixed asset or multi-sector managed funds
These funds invest across more than one asset class. They are usually labelled by how much of the fund is held in growth assets like shares and property, and defensive assets like cash and bonds.
Growth – around 85% growth assets, the rest defensive.
Balanced – around 70% growth assets, the rest defensive.
Conservative – around 30% growth assets, the rest defensive.
Cash – 100% cash or cash-equivalents such as short-term deposits and bank bills.
How managed fund investments are chosen
Active funds rely on a fund manager to make ongoing decisions about investments. Some aim to beat a market index. Others aim to produce steady income or protect against loss. Some active funds use an absolute return strategy that aims for positive returns regardless of what markets are doing.
Passive funds – also called index funds – try to match a market index rather than beat it. There is less day-to-day decision-making, so fees are usually lower than active management fees.
Responsible, sustainable or ethical funds screen investments against environmental, social or governance criteria. These can be active or passive.
See what effect fees have on your investment by using the Managed funds fee calculator.
Benefits of managed funds
Managed funds can make investing easier for people who do not want to choose every investment themselves.
Benefits include:
add_box access to a range of investments in one product
add_box professional management
add_box easier diversification, which means spreading your money across different investments
Risks of managed funds
Managed funds are not risk-free. The value of your investment can fall, and you may get back less than you invested.
Risks can include:
indeterminate_check_box market risk – the assets in the fund can fall in value because of events affecting the entire market
indeterminate_check_box sector risk – a fund focused on one part of the economy can be hit harder when that sector does badly
indeterminate_check_box liquidity risk – you may not be able to get your money out as quickly as expected, and funds can restrict, delay or stop withdrawals in some circumstances
indeterminate_check_box currency risk – overseas investments can be affected by changes in exchange rates
indeterminate_check_box inflation risk – your returns may not keep up with rising prices, so your money buys less over time
indeterminate_check_box interest rate risk – changes in interest rates can affect the value of the fund’s investments, especially bonds and other loans
indeterminate_check_box credit risk – a borrower that the fund has lent to may not repay the loan
indeterminate_check_box concentration risk – holding a small number of investments means any single loss has a bigger impact on the fund
indeterminate_check_box gearing risk – if the fund borrows to invest, both gains and losses are magnified
Not every managed fund will have all these risks. The main risks depend on what the fund invests in and how it is managed.
Mia buys a diversified managed fund
Mia has saved $8,000 and wants to start investing in shares. She does not feel confident choosing individual shares, so she looks at managed funds that invest in Australian shares and overseas shares. She reads the Product Disclosure Statement to check how the fund invests, the fees she will pay, and the level of risk. Mia sees that using a managed fund could help her access a diversified mix of investments to lower her risk. She buys units directly with the manager.
Deciding if managed funds are right for you
There are a lot of different ways you can invest your money – managed funds are just one option.
Managed funds might suit you if:
- you want a simple way to invest
- you want your money spread across a range of investments
- you do not want to choose and manage each investment yourself
- you are comfortable that the value can rise and fall
Managed funds may not suit you if:
- you want full control over every investment choice
- you need your money back at short notice
- you do not want to pay ongoing fees
- you are not comfortable with the risk of losses
Managed funds are not an appropriate investment for everyone. It’s important to consider your investing timeframe and risk tolerance. Learn more about developing an investment plan, and how to seek financial advice.