Managed funds: Back to basics

Trilogy is one of Australia’s leading fund managers of property based investments. Our undeniable passion and experience in property and investments remains at the heart of everything we do. At Trilogy, our core business is as an investment manager and one of the most common ways people choose to invest their money.

Many large superannuation funds will use managed funds to access the skills of investment managers and different types of investments.

However, if you’re new to the idea of a managed fund, we’re going back to basics on exactly how they work and what they’re all about.

The basics of managed funds

When you invest in a managed fund, you are allocated a number of  ‘units’ based on how much you invest and the current price of each unit.

For example, if you invest $10,000 and the unit price at the time is $1, you would own 10,000 units. If the unit price rises to $1.10, the investment will be worth $11,000 ($1.10 x 10,000 units). Or, if the unit price drops to $0.90, the investment would then be worth $9,000 ($0.90 x 10,000 units).

Managed funds can be an effective way to make the most of your investment dollars because your contribution is pooled with the money of other investors. This delivers benefits such as:

  • Asset diversification – This can help investors achieve a lower level of investment risk across their entire portfolio. Depending on the type of managed investment it may invest in shares, property, fixed interest or cash, or a specific combination of these assets.
  • Broader market access – Some markets may be unavailable to you as an individual investor.
  • A tailored portfolio – Your investments can be designed to suit your needs, whether you want a regular income or capital growth.
  • Professional management and administration of your investment – A team of experienced investment managers will be in charge of your money. Managed funds are also convenient for the investor because the manager handles the day-to-day fund administration.

The returns

There are two types of returns for managed funds, unit price growth and distribution income.

Unit price growth: This occurs when the value of the underlying investments in the fund have grown over the period of the investment. This results in an increase in the price of units in the fund.

Distribution income:  Unit holders receive distribution income when a managed fund makes a payment to investors during the course of the investment. The income consists of the earnings the fund has generated over the period and may include capital gains (from the sale of fund shares or other fund investments) or income (from dividends or interest).

Most managed funds will give you the option of receiving your distributions as cash directly into your bank account, or reinvesting your distribution back into the fund.

The risk versus return

There is a simple rule about risk which generally holds true for all investments: the higher the possible return, the greater the risk of loss over the short term. However, if you plan to invest over the long term, these risks can be reduced. For this reason, funds with a higher exposure to growth assets such as shares and property are best suited to those who are looking to invest for strong returns over longer periods of time (greater than seven years) and who are prepared to experience short-term volatility along the way.

Funds with a higher exposure to more conservative investment types, such as Australian fixed interest, mortgages and cash, are less volatile but generally deliver lower returns.

Diversification can reduce risk. By investing across a range of asset classes that experience good performance at different times, the higher returns you receive from one type of investment can help to offset lower or negative returns from another.

Investing in managed funds requires a medium-to-long term investment horizon, with the flexibility to delay redemption in ‘hard times’, particularly those that include growth assets. Switching investments or redeeming the investment before this time elapses can result in you receiving less back than you originally invested.

The fund manager

Naturally a fund’s track record is important but you do need to be careful as past performance is not a reliable indicator of future performance. This is where the quality of the management team and understanding how the fund invests is crucial, as different investment styles tend to perform differently across the economic cycle.

Are you considering investing in a managed fund yourself? Check out some examples of what to look for when thinking about investing in a mortgage loan fund.

This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425 as responsible entity for the managed investment schemes mentioned in this article. This advice is general advice only and does not consider your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.