Managed fund basics

Article by Philip Ryan, Trilogy Funds' Managing Director

Personally I have almost two decades of direct experience in the management of investment schemes, or managed funds. It is our core business 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 as a way to access the skills of investment managers and different types of investments.

Managed funds: the basics
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 90 cents, 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 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 is paid to unit holders when a managed fund makes a payment to investors and are received during the course of your investment. They consist 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.

Risk and 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 time periods (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.

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.

Please note that Trilogy Funds provides general information only and does not take into account any of your personal circumstances or seek to provide a personal recommendation to you. You are encouraged to seek expert advice before acting on any information contained in our resources.