Managed Fund Basics – How They Operate and Why They Work

David York — Fri, 20 Aug 2010 11:26:44 +0000

For anyone new to investment, it is vital to understand the basics of managed funds, their rationale, and what they bring to the investor.

A Range of Money Managers and a Range of Objectives

Managed funds give the investor an opportunity to participate in the growth of the economy. This participation can be spread over a range of assets, such as shares, property, commodities and bonds, or can be concentrated in just one of these assets, or possibly another asset. As this range of assets, or more specific asset performs, so too does the managed fund. There are many money managers out there. Some may focus on trying to outperform a certain stock market index, or possibly focus on a specific attractive sector (for example, emerging markets). Performances and objectives regarding timeframe will therefore vary.

Investment Over a Broad Range of Securities and/or Assets

As mentioned above, many managed funds will invest in a range of assets. For novice investors, such a fund is the safer option if starting out and looking for more general investment exposure. Your funds are essentially divided up across all these assets. To gain such a broad exposure by yourself would be very difficult, and one would end up spending huge amounts in brokerage! A dedicated fund manager, by managing large amounts of money for many investors, can therefore reduce these investment costs, by spreading them across all investors.

Commissions – Active and Passive Funds

A commission is what you pay a fund manager, for managing your money. In general, these may range from around one to a few percent. Naturally, a fund that just replicates an index (for example the ASX100) should charge less than a fund which requires the manager’s expertise and more active management of the fund. Some funds may also pay additional commissions should the fund outperform a given index, or other asset that is easily able to be valued. It’s worth comparing a few similar funds to see whether the performance of the fund justifies the commission being charged.

Returns Linked to Those of the Economy

Our financial system is based on the pursuit of economic growth. The profit motive spurs companies on to continually develop better products, more efficiently than before. The beauty of managed funds is the broad based opportunity they afford investors to participate in this economic system. As companies in general grow, and increase in profitability, so too should managed funds investing in such companies.

Liquidity and Valuation

As managed funds are made up of a number of underlying assets which are continually changing in value, periodic collation of the value of all these assets is required. Your fund manager will do this, leading to a “unit price”, which they will publish periodically. You can then compare this unit price against the unit price at the time you invested, to see how your investment is faring.

If you are not happy with your fund’s performance, or your investment outlook has changed, selling out, or switching between funds is fairly easy. Please note that there may be exit fees, so beware of chopping and changing too much, as this may end up being a drag on your overall returns.

Managed funds revolve around share trading by professionals, in order to allocate your funds to appropriate investments.

Stock Market For Beginners

Managed Fund Basics – How They Operate and Why They Work is a post from: Stock Market For Beginners