Do you want to grow your money but need more investment knowledge and experience? Managed or Mutual funds are a smart way to invest and build wealth over time.
These funds pool the money of individual investors and invest the combined capital across an array of asset classes and market sectors. They are a great investment choice for investors who seek regular income or capital growth.
This blog discusses Managed Funds/Mutual Funds and how to invest in them in Australia. Learn about their types, pros, and cons, ways to find the right fund, and get answers to some of the frequently asked questions on Mutual funds/Managed fund investing.
1. What Are Managed Funds?
Managed funds are popular among investors as they make investing simple. They are personalised investment portfolios overseen by a professional fund manager who holds and controls the money on behalf of investors to meet their financial needs and goals.
A fund manager is responsible for "investing and diversifying" investors' funds across various asset classes and ensuring that the fund performs per the investor's objectives.
As per the Australian Taxation Office, examples of a managed fund include:
Cash management trust
Money market trust
2. How Does A Managed Fund Work?
Managed funds pool your funds with other investors to access various investment opportunities. Specialist investment managers invest the accumulated money per the fund's objective and strategy.
When you invest in a managed fund, the fund allocates specific units where each unit represents an equivalent portion of the fund's value. For example, if you invest $5,000 at a unit price of $1, you get 5,000 units.
Investing in a managed fund doesn't imply that you own any of the underlying investments. Instead, you own specific units in the fund. The same way you buy or sell shares.
The unit's value or price reflects the market value of the assets held in the fund at a given instant. Thus, the cost of the units may appreciate or depreciate daily with the rise and fall of the market.
Based on the type of mutual fund you invest in, you receive regular income as dividends from the fund, depending on the profit it generates from its underlying investments.
However, this is different with capital growth-oriented funds, where the profits are reinvested into underlying assets, leading to NAV appreciation.
3. Where Can You Find Managed Funds?
Some managed funds may be available on the stock exchange (not all of them).
Those listed on the stock exchange are called Listed Funds, and you can buy and sell them on the exchange. Their value is determined daily based on the price of the underlying assets held on the relevant stock exchange.
On the other hand, funds that are not on the exchange are traded directly through the fund manager. Compared to listed funds, they are valued less frequently by the fund.
4. Types Of Managed Funds
Managed funds are available in various types. To select the right fund, you need to assess the features of different funds, the returns offered, and the associated risks of managed funds.
Single Asset Managed Funds
Multiple Assets Or Multi-Sector Managed Funds
This type of managed fund invests in a variety of asset classes. They are categorised as follows:
5. What Is A Mutual Fund?
Mutual funds are investment companies that combine money from a group of investors in one big pot. They buy financial securities like stocks, commodities, bonds, and even real estate to lower costs, maximise returns and diversify investment risks.
Each mutual fund has an objective that it mentions in its prospectus. Due to their fee structures, they are for longer-term investors and unsuitable for frequent trading.
Investors who invest in these funds don't own the securities in that fund but hold fund shares. This fund share determines the amount of money that each investor receives.
6. Why Should You Invest In Mutual Funds?
The main advantage of Mutual funds is that they are broadly diversified to lower investment risks. They are comprehensive investment vehicles that avoid researching and buying individual stocks, which makes it easier and less time-consuming for investors.
Another essential benefit of investing in Mutual funds is their highly-liquid nature which makes it easy for investors to buy and redeem shares at any time.
7. Different Types Of Mutual Funds
You can categorise mutual funds on the investing style, the type of assets they invest in, associated risks, ways of income generation, and the growth potential of the underlying assets.
8. How Do Mutual Funds Work?
Mutual funds require a minimum investment of around $1,000 to $5,000. They trade only once during the day after the markets close. The "Net Asset Value" (NAV) determines the price of the stocks in a fund. The "NAV' is calculated after the market closes.
NAV = (The total value of all the assets held in the portfolio - any liabilities) / the number of outstanding shares.
An investor can buy or redeem mutual fund shares directly from the fund by paying entry and exit charges (as applicable).
9. How Do Mutual Funds Generate Returns?
Investors usually earn a return from a mutual fund on a quarterly or yearly basis using any one of the three ways:
From dividends on stocks held in the fund's portfolio
Interest on bonds held in the fund's portfolio
Capital gains if you sell the fund's shares at a higher price and earn a profit
Funds often give investors choices to either receive dividends/interest in a check or reinvest the earnings to buy more shares of the mutual fund.
10. Steps To Invest In Mutual Funds In Australia
Follow the below six steps to kickstart your investment in Mutual/Managed Funds:
Step 1: Evaluate Your Risk Tolerance And Investment Objectives
Assessing your risk appetite and financial goals will help determine the appropriateness of the investment product. Investors with low-risk tolerance should avoid stock and aggressive bond funds, and stick to highly rated government, corporate bonds, or money market funds.
However, high-yield bonds and stock funds could be ideal if you want to generate significant returns and take on more risk.
Step 2: Decide Your Investment Strategy
Choose how you want to generate income from your mutual fund investment - capital gains or dividends. Buy and hold on to growth stocks if you're going to grow wealth, stay invested for the long term, and don't need to generate immediate income.
On the other hand, if you want to earn a regular income on your investment, then income-oriented funds are an excellent choice. These are dividend-bearing shares and interest-bearing bonds.
Step 3: Determine Your Tax Strategy
Gains from mutual funds are taxable and can impact your annual tax liability. The more income you receive in a given year, the higher your capital gains tax brackets and ordinary income.
If you want to reduce your tax liability, avoid dividend-paying funds and choose funds that focus on long-term capital gains. Funds that invest in tax-free municipal or government bonds that yield interest and aren't subject to federal income tax are a good choice.
Step 4: Analyze Funds
It would be best to study several metrics before deciding on the right mutual fund for your investment:
Its expense ratios
Its investment holdings
The reputation and experience of the management team
How long has it been around
Long-term track record
Fees (Establishment fee, Contribution fee, Management fees, Performance fee, and Adviser service fee)
Review the risks by reading the (Product Disclosure Statement)
Step 5: Decide Where To Buy Mutual Funds
People who contribute to an employer-sponsored retirement account, like a 401(k), are primarily invested in mutual funds.
Else, you can buy it directly from mutual fund companies that created the fund, like Vanguard. You can even consult a traditional financial advisor to purchase mutual funds. Still, you may have some advisory fees for the same.
Step 6: Track The Performance Of Your Managed Fund
Once invested, regularly track the performance of your mutual fund at least once a year. As per the law, every fund manager has to update the fund's investors on the fund's performance once every 12 months.
Read the performance reports and the fund's annual statement to understand how your investment is doing and figure out if it is helping you achieve your financial goals. So, based on your financial goals and investment horizon, monitor the performance of your managed funds periodically.
11. Managed Funds Advantages And Disadvantages
Looking at the pros and cons of investing in Managed Funds before buying them makes sense.
It is easy to access a managed portfolio of local and global stocks.
You don't need in-depth investment knowledge and do hard work researching and forming buying and selling decisions.
Both mutual and managed funds are subjected to industry regulation that ensures investors' transparency, fairness, and accountability.
It relieves you from the hassle of constantly tracking market movements all day.
Diversification is another advantage of managed investment funds. It lets you spread your money across assets of numerous industries and companies.
You get exposure to all the stocks in the underlying fund at the expense of a one-time brokerage fee instead of paying a brokerage fee on each transaction for buying individual shares. Thus, Managed funds make it simple, quick, and affordable for investors to diversify their investment portfolio with individual shares.
Australian-managed funds are ideal for youngsters as they have low minimum investment requirements. Most managed funds allow you to start investing just a few thousand dollars or less.
With managed funds, you get capital appreciation through a rise in unit price and dividends.
You get several options to find one that suits your risk appetite and needs, i.e., conservative, balanced, growth, or high growth. You can choose from various available assets such as cash securities, stocks, bonds, real estate, listed property trusts, agriculture or agribusiness schemes, fixed interest investments, mortgage schemes, and infrastructure assets.
Disadvantages Of Managed Funds/Mutual Funds
Most Managed funds charge entry, exit, commissions, and ongoing management fees. Those funds that don't charge entry fees usually levy a higher-than-average exit fee or vice versa.
Entry fees may range from 0% to 5% of the deposit amount.
Ongoing yearly fees or the Management Expense Ration range from 0.5% to 3% of the balance value.
Exit fees range from 0% to 2% of the withdrawal value.
12. Frequently Asked Questions (FAQs)
Is Investing In Mutual Funds A Good Idea?
Mutual funds give the benefit of professional supervision and management of investment to their investors. The fund managers follow a disciplined investment approach and perform immense market research before taking any investment decision.
Furthermore, as mutual funds invest in diverse assets, they are considered the best investment vehicle for diversification. For example, suppose a fund manager invests money in stocks. In that case, they can select stocks from varying sectors like finance, IT, energy, healthcare, FMCG, etc.
Diversification makes it safer than other investment options as it helps reduce the risks associated with investing entire capital in a particular security.
Additionally, they can beat inflation, making them an attractive investment option in long-term financial planning and achieving financial goals.
Mutual funds are versatile investment vehicles to realise your varying investment goals, such as retirement, child's education, marriage expenses, etc., at a time. However, the investment duration and the amount required to pursue these goals may differ based on one's financial plan.
Who Should Invest In Managed Funds?
The selection of any investment option depends on your existing financial situation and long-term goals. Managed accounts are ideal for those who have:
Long-term investment goals
Substantial investable assets
A unique portfolio
A need for personalised advice
What Are The Best-Managed Funds In Australia?
Here we are sharing managed funds performance tables to help you determine the best performing large share Managed Fund in Australia:
|Index ETF Return Before Fees||9.06% p.a.|
|Index ETF fees||0.10% p.a.|
|Index ETF net return||8.96% p.a.|
|Average managed fund return before fees||8.8% p.a.|
|Average managed funds fees||1.32% p.a.|
|Average managed fund net return after fees||7.48% p.a.|
|$100,000 invested in the index ETF 5 years ago||$153,580|
|$100,000 invested in the average managed fund 5 years ago||$143,429|
|Managed funds that beat the index ETF benchmark over 5 years||80 funds (25.7%)|
|Managed funds that underperformed the index ETF benchmark over 5 years||231 funds (74.3%)|
Vanguard Australian Shares Index ETF is the index ETF benchmark (As of May 2022).
Best Performing Large Cap Australian Managed Funds Over Five Years
|Product Name||1-Year Return||3-Year Return (p.a.)||5-Year Return (p.a.)||ICR
|Chester High Conviction Fund||20.9||19.7||15.8||0.95|
|Bennelong Australian Equities Fund||-4.4||12.9||12.9||1.00|
|Macquarie Australian Shares Fund||12.1||12.1||12.1||0.60|
|Alphinity Sustainable Share Fund||8.3||12.0||12.0||0.95|
|Smallco Bradcap Fund||5.5||9.0||11.6||1.20|
|Australian Ethical Australian Shares Fund (Wholesale)||1.7||14.4||11.6||1.10|
|Alphinity Socially Responsible Share Fund – Class B||8.1||11.8||11.6||0.90|
|Ausbil Australian Active Equity Fund||13.4||13.7||11.3||0.90|
|Hyperion Australian Growth Companies Fund||-10.7||12.7||11.3||0.95|
|First Sentier Wholesale Australian Share Fund||-3.9||10.6||10.9||0.96|
Vanguard MSCI Australian Small, Companies Index ETF, is the index ETF benchmark.
Best Performing Small Cap Managed Funds In Australia Over Five Years
|Product Name||1-Year Return||3-Year Return (p.a.)||5-Year Return (p.a.)||ICR
|Ausbil MicroCap Fund||19.1||21.2||21.3||1.2|
|Eley Griffiths Group Emerging Companies Fund||10.6||18.8||20.8||1.25|
|SGH Emerging Companies Fund||16.6||22.8||20.8||1.03|
|Perennial Value Microcap Opportunities Trust||-14.7||10.9||18.2||1.2|
|Pendal MicroCap Opportunities Fund||7.3||19.4||17.7||1.2|
|OC Micro-Cap Fund||-9.9||17.1||17.6||1.2|
|Macquarie Small Companies Fund||9.3||14.2||17.5||0.9|
|Macquarie Australian Small Companies Fund||9.2||14.0||17.0||0.99|
|Fairview Equity Partners Emerging Companies Fund||4.7||13.0||15.1||1.2|
How Do Beginners Invest In Mutual Funds?
Managed funds are ideal for beginners as they are professionally managed and don't require much effort and knowledge. However, beginners need to do research when putting money into assets.
Here are some of the points that would help them in their investment journey:
Identify your personal and financial goals and investment timeframe. You want to save more with your existing financial assets to build a contingency fund or for retirement. Use a mutual fund calculator to calculate your returns while considering tax rates and inflation.
Refrain from basing your buying decision on the daily ups and downs of the market. Instead, compare funds based on their long-term returns (5 or 6 years) to get an idea of how much returns you can expect in the future.
Decide your investment timeframe. If your priority is security, go with the short investment timeframe (5 months to 3 years) or long-term investment (at least five years) for investment growth.
Read the prospectus and PDS (product disclosure statement) carefully to understand the mutual fund's investment objectives. Find out the risks involved, fees, performance, ways to file a complaint, estimated return, expenses, etc., to find which assets to invest in. Please review them before investing to make sure they meet your risk appetite.
Assess your tax liability by looking for funds that pay distributions/dividends regularly. Some asset classes, like shares, offer certain tax concessions to their investors via dividend imputation or franking credits.
Besides tax incurred on dividends, also evaluate how much capital gains tax you will need to pay on selling your investment at a profit. You can seek a financial advisor's assistance to reduce your tax liability when investing in MFs.
Start small and gradually increase your investment once you are confident of the performance of the investment asset. Have a monthly savings plan that could sustain your Managed Funds.
Most investment experts invest in around 3 to 4 mutual funds to take the best advantage of diversification. Investing in SIPs in mutual funds is better than lump sum investments, as it helps diversify risks over time, keeping in tune with market trends.
Regularly check the fund's performance and track how your investment is doing.
Which Type of Mutual Fund Is Best For Beginners?
Though you can buy mutual funds in various types, balanced funds/hybrid funds are most suited for beginners. They expose them to a good mix of equities (high-risk) and debt (low-risk) that can help diversify their portfolio and earn good returns.
Some balanced Mutual fund options you can select are:
Ausbil Dexia Limited – Ausbil Balanced Fund
Advance Asset Management Limited, Advance Balanced Multi-Blend Fund
Ausbil Investment Management, Ausbil Balanced Fund
What Are The Top 10 Managed Funds In Australia?
We have compiled some of the best-managed Funds in Australia that you can consider:
Advanced Asset Management – Advanced Cash Multi-Blend Fund
Macquarie Investment Management – Macquarie Australian Fixed Interest Fund
Mutual Limited, Mutual Cash Term Deposits, and Bank Bills Fund
Advance Asset Management, Advance Australian Fixed Interest Multi-Blend Fund
Janus Henderson Investors (AUS), Janus Henderson Australian Fixed Interest Fund
Yarra Capital Management, Yarra Australian Bond Fund
Australian Unity Funds, Platypus Australian Equities Fund – Wholesale
Bennelong Funds Management Limited, Bennelong Australian Equities Fund
Colonial First State Investments Limited, FirstChoice Wholesale Investments - Ausbil Wholesale Australian Active Equity
Fidante Partners Limited, Alphinity Sustainable Share Fund
How Do I Put Money Into A Mutual Fund?
There are two ways in which you can purchase mutual fund shares:
Through a broker for the fund
From the fund itself
To buy the mutual fund, you need to pay the fund's per share NAV (Net Asset Value) + any fees charged, like sales load at the purchase time.
When you invest in any managed fund, you purchase 'units' in the managed investment scheme or 'stocks' in the CCIV. The number of stocks /units you get depends on the asset price (i.e., the stock or unit) the fund invests in. In most managed funds, you will require a minimum amount to invest, i.e., $5,000.
You can sell your assets (whenever necessary) back to the fund at any time and get the payment within seven days of placing the "Redeem" request.
What Are The Best-Managed Funds For Beginners?
Commbank-managed funds are ideal for beginner investors as the platform allows them to begin investing with as little as $1,000. It is one of the reputable brokers in Australia that offer many benefits for investing in managed funds. Some of these include:
Diversification across an array of global investment strategies.
Access unique investment opportunities that only a few brokers offer to individual investors.
Enable you to make regular monetary contributions or reinvest income to build a corpus
Access the experience or expertise of professional fund managers.
Vanguard Managed Funds are another excellent option to invest your money. By opening a brokerage account, you can access a broad range of mutual funds from 100's companies.
Vanguard mutual fund offers several strategies that you can choose based on your investment objectives, time horizon, and risk tolerance. These include:
How Much Should You Invest In A Mutual Fund?
There are a few things to consider when deciding how much funds you should keep aside for investing:
Calculate how much you need for basic requirements to sustain your life. These could include house rent, utilities, food, children's education (if any), medical expenditures, and other necessary expenses.
Keep aside some amount as a contingency fund to meet any emergencies. You can invest this amount anywhere you can withdraw it without delay, such as a savings account, swipe in FDs, liquid mutual funds, etc.
Invest the remaining money in mutual funds/managed funds based on your long-term goals, risk profile, age, and time horizon.
Invest your income based on the "50:30:20 Rule", where 50% of your income goes to meet your fixed obligations, 30% towards meeting contingencies, and 20% toward investing in MFs.
How Do I Make Money From Mutual Funds?
Mutual funds comprise a group of investments specializing in stocks, property, bonds, or gold. So, the type of mutual fund you invest your money in will determine how much income you will earn. Investing in funds you understand and align with your financial objectives is essential.
Mutual Fund investors generally make money from their investments in 3 ways such as:
Cash dividend payments on stocks
Interest on bonds
An increase in the price of securities or funds with time or Capital gains.
With property-based funds, you earn based on property appreciation, profits from business operations, and rents.
What Is The Best Mutual Fund In Australia For Exposure To Equities?
There are three mutual fund examples in Australia that invest in equities and pay dividends to their investors. Including these funds is a great way to get the benefits of diversification and earn regular income through high dividend yields.
AMP Capital Equity Income Generator Fund
Founded in 2013
It focuses on high dividend-paying sectors in the financial services sector, real estate, consumer cyclical, and communications services.
The minimum fund investment required is $10,000.
Unique Selling Feature: The fund provides higher dividend income than those listed on the S&P/ASX 200 Accumulation Index. The annual average annual yield is 5.0% over the long term and the Annual management fee of 0.72%.
The dividend income comprises franking credits.
T. Rowe Price Australian Equity Fund
Founded in 2012
Comprises a basket of Australian equity securities that accounts for total net assets of approx. AUD 75 million
It focuses on the financial sector, real estate, materials, and consumer discretionary.
It provides long-term capital appreciation that has outperformed the S&P/ASX 200 Index.
Offers 8.48% Annual Average return
No minimum investment is required.
Aberdeen Australian Equity Fund
Founded in 1985
It focuses on the financial, health care, energy, materials, and industrial sectors.
The fund's total net assets comprise AUD 135.1 million, or US $98.1 million.
To outperform its benchmark index - the S&P/ASX 200 Accumulation, the fund invests 88.5% of its assets in equities listed on the ASX that have increased earning potential and are capable of capital appreciation.
It offers yields lower than the above two funds.
Offer a distribution yield of more than 10% as of March 1, 2022
It charges an expense ratio of 1.53%.
How Is A Managed Fund Different From Exchange Traded Funds (ETFs)?
Here are the managed funds vs ETF comparisons on different aspects to help you understand the differences between the two:
High intra-day liquidity
Vary substantially from high to limited liquidity in closed-end structures
|Pricing||Real-time, Intra-day||Vary from the end of the day to weekly or monthly|
|Accessibility||You can trade units like regular stocks on the ASX||You need to apply through a fund manager adviser, which has a higher administrative fee.|
|Portfolio Transparency||Portfolio elements are visible daily||Rarely available to investors daily|
|Fees, and Expenditures Charged||Brokerage costs, low management fees, bid/offer spreads||Higher management fees, higher expense ratios, higher operating costs, performance fees, and Buy/sell spreads.|
|Diversification||Vary based on the fund, but usually high with exposure to an entire index||Vary based on the fund|
How Does A Mutual Fund Different From Exchange Traded Funds?
Often people ask what is better than mutual funds. The below comparison- mutual funds vs ETF- will help you determine which is the best investment option.
|Affordability||As they are passively managed index funds, they have a relatively lower expense ratio, as low as 0.10%.
Their cost efficiency leads to higher net returns over the long term.
|Comparatively expensive as they are actively managed and have a high volume of trading activity and transactions. Involve higher operating fees and commissions.|
|Trading Time||ETFs can be bought and sold at any time of the day at varying prices on a stock exchange.||Mutual funds can only be bought at the end of each trading session.|
|Tax Efficiency||Due to their creation and redemption structure, investors get a capital gains advantage.||More tax liabilities.|
|Minimum Investment||No Minimum Investment is required. One can become an ETF investor by buying 1 unit of the fund.||Most MFs have a minimum investment limit that is mentioned in their terms. This amount is greater than the NAV of 1 x fund unit.|
|Liquidity||Offer higher liquidity as ETF units are directly linked to the liquidity of the shares included in the index.||Offer lower liquidity than ETFs.|
|Trading Account||A trading account is essential to trade ETFs on a stock exchange like ASX. .||No need to open a trading account to buy mutual funds.|
What Is The Average Return on A Mutual Fund?
Like other investment options, mutual fund returns can vary, ranging from losses to double-digit returns. The returns you receive depend on which sectors they invest in, their size, investment styles, type of mutual fund (active fund, passive fund, index fund, or small-cap fund), and more.
Mutual funds that comprise fixed-income assets have given lower returns than the stock exchange in the past. On the other hand, a mutual fund made of small-cap stocks offers greater volatility and higher growth potential to its investors.
In the long term, a passive fund/Index fund that tracks the performance of a specific index tends to outperform active funds that a fund manager actively manages.
There is no average annual return that applies to all mutual funds. However, based on the past performance of the Australian stock exchange, investors can get around 8% to 10% return from buying and holding mutual fund units.
How Much Are Taxes on Mutual Funds?
The following factors influence the tax liability of a mutual fund:
The type of funds you invest in: Equity and Debt-oriented mutual funds.
The kind of gains you earn (dividend income or capital gains)
For how long do you long the fund
The below shows how much tax you will need to pay when selling mutual funds:
What Is Managed Fund Distribution?
Managed distribution programs are for closed-end funds that expect capital appreciation. These programs aim to convert the fund's expected long-term total return into enticing regular distributions.
Closed-end fund-managed distribution programs enable consistent, and regular payment of distributions to stockholders by:
Evaluating the long-term total return of a fund (both long-term appreciation and income, net of expenses)
Fix a regular distribution amount to pay per month or per quarter to match the total distributions of the fund to its total return over time
Most investors invest to earn a passive income. Managed accounts and mutual funds are ideal instruments that deliver it. They also offer the benefit of a disciplined approach and professional management of the accounts that guarantee income.
This guide has given you valuable insights to start your investment journey in Mutual Funds/Managed Funds while maximizing profits.
Useful Links to Explore: