So what is a managed fund? Quite simply, it is a fund that is managed professionally for a fee by someone who is an expert. Investors' money is pooled together and then invested into a diverse portfolio, the composition of which will be determined by the type of fund that it is.

Unit trusts are the most common form of managed fund, and the way in which funds are invested and managed is set out in a trust deed. The assets of the unit trust are held by an independent trustee on behalf of investors. The total pool of assets in the trust fund is divided into 'units' which are owned by investors in proportion to the amount of money they have contributed.

On 1 October, 2007 a special type of managed fund came into existence called a Portfolio Investment Entity, or PIE. PIE's do not pay tax on capital gains made on investments in most Australasian shares. From 1 April, 2008 the marginal rate of tax paid by investors in PIEs will be capped at 30%, which is a significant benefit for investors on higher marginal tax rates.

Some managed funds invest in only one of the four asset classes (cash, fixed interest, property or shares), whereas some are diversified funds that invest in all four. Managed funds can also offer diversification across countries, industries and companies. This is a particular advantage for small investors, who don't have sufficient funds to spread in so many directions.

Diversified funds are also a good vehicle for saving small, regular amounts that would otherwise have to be accumulated into amounts big enough to meet minimum investment requirements. Transaction costs, such as brokerage, can be kept to a minimum through pooling funds. Investing overseas is considerably easier through a managed fund, as the investment selection and all the associated paperwork is taken care of by the fund manager. Managed funds make it possible therefore for investors to gain the benefits of investing in a market without having to know anything about that market, without the administrative hassles and without needing large amounts of capital.

So why is it that managed funds have a tarnished reputation? Managed funds became 'guilty by association' when international share markets fell in value in three consecutive years between 2000 and 2003. The job of a fund manager in a falling market is to manage the investments so that the drop in value is less than the drop in the market. The performance of a managed fund should be compared not against bank deposit rates, but against the returns that you would have achieved by investing directly in the same market. All investments have a degree of risk, and if your investment strategy is to invest in international shares, you take the risk of being in that market along with the potential for high returns.

A good adviser will help you determine how much exposure you should have to share markets based on many factors including your investment time frame, your feelings about risk and return and the amount you have to invest.

Article by Liz Koh

Liz Koh is a financial adviser. A copy of her disclosure statement can be obtained on request and free of charge by calling 0800 273 847.

Ph 0800 273 847

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