Managed Funds

A managed fund is a 'unitised' investment that combines or 'pools' the money of investors (unit holders) and then makes use of the expertise of a team of professional managers to invest that money. Rather than directly owning the underlying assets, investors are allocated units in the fund when they invest. If the value of the underlying assets of the fund rises, so will the value of the units, and vice versa.

For investors that don't have the time necessary to research and monitor the sharemarket, managed funds (known as mutual funds in the US) are a great way to access the knowledge and experience of a professional. A number of Australian websites offer free research tools for investors, including ninemsn Money's Find Managed Funds.

It's not about timing the market, it's about time in the market. Investors shouldn't put off investing and shouldn't lose sight of the long-term goal of wealth creation. Many investors delay investing because they are not sure about the "right" time to invest and they are concerned about short-term market volatility. To maximise the benefits of compounding it is important to give investments time to grow. Investors should make regular investments and reinvest distributions or dividends to take full advantage of the effects of compounding.

Dollar cost averaging is the strategy of investing in managed funds over time to even out short-term price movements and take the guesswork out of picking the "right" time to invest. By regularly investing smaller amounts investors can effectively average the entry unit price received over time, rather than investing in a single lump sum. Most managed investments will allow investors to set up a regular investment plan to facilitate dollar cost averaging.

It is important to read the fee section of the product disclosure statement before investing in a managed fund. There are a number of different fees that may apply, but as you will see further below many of these managed fund fees are unnecessary and can be avoided.

The management expense ratio (MER) is the ongoing fee charged by the professional investment manager for managing the fund and associated administration expenses. This fee is most often expressed as a percentage of the invested balance and typically ranges from 1.5% to 2.5% but may be higher for funds that require more active management - such as hedge funds and geared funds. The MER is the cost of having a professional manage your money and cannot be avoided, but it is well worth comparing this fee because there is no evidence that higher fees will lead to higher returns.

The buy/sell spread is charged when an investor invests or withdraws money from a fund and is usually incorporated into the fund's unit price, resulting in an entry unit price and an exit unit price that are slightly different. It is usually paid to the fund as opposed to the fund manager, and covers brokerage and transaction fees incurred in buying/selling securities to fulfil an investor's investment/withdrawal request.

An entry fee of 4% to 5% is charged by most managed funds, and is deducted from all investments made - including the initial investment, all subsequent investments and regular investment plans. This fee is usually paid to the financial adviser listed on the account, and in the absence of a listed financial adviser it is retained by the fund manager. By investing in managed funds through a discount investment broker it is possible to get a 100% rebate of this entry fee.

Your adviser may also receive an adviser service fee that is deducted from your investment, typically in the vicinity of 1% to 2% per annum and lasting the life of the investment. This fee will effectively reduce your returns, and will add up to a significant amount if the investment is held for 10 or 20 years. One way to avoid this fee is to pay for financial advice (if and when required) upfront on a fee for service basis. This will save a lot of money in the long run and ensure advice that is not influenced by commissions.