Managed fund structures are widely used by investors. This article explains what they are, how they work, and outlines key advantages and disadvantages.

What is a Managed Fund? A managed fund is a professionally managed investment portfolio that pools the money of multiple investors. A fund manager is appointed to manage the fund, including the selection of underlying investments and maintaining client records. By pooling money with other investors, you may gain access to investments not normally available if you invested directly, or enable you to achieve a greater level of diversification. The managed fund structure allows for professional management of your money.

Units in a Managed Fund: When you invest money into a managed fund, you receive ‘units’ in that fund. The number of units you receive is calculated based on the amount of money you invest divided by the unit price on that day. For this reason, managed funds are also often called “unit trusts.” The unit price may increase or decrease in line with the value of the underlying investments.

Investment Options: The fund manager may offer a range of investment options that you can choose from. Each option has different investment goals, timeframes, and risk profiles. Some managed funds provide a diversified allocation to asset classes based on a risk level. For example:

• A ‘balanced’ fund invests approximately half of the portfolio in growth assets (shares and property) with the remainder in more defensive assets (cash and fixed interest).
• A ‘conservative’ fund invests predominantly in secure investments like fixed interest (bonds) and cash with a smaller proportion in growth assets.

Other funds might invest in a specific type of asset, such as Australian shares, international shares, property, or cash. Different investment styles, such as value or growth investing, may be used to manage the portfolios.

Choosing the Right Option: When investing in a managed fund, you need to choose the options best suited to your personal preferences and financial goals. Considerations include:

• Your risk profile
• Your investment time horizon
• Your need for diversification across asset classes
• Your preference for investing in a specific investment or asset class

The Product Disclosure Statement provides you with important information about the investment options to help determine their suitability for your circumstances.

Investment Returns and Taxation: The underlying assets of the managed fund produce income returns (including interest, rental return, realised capital gains, and dividends) and/or capital growth. The fund manager deducts fees and expenses from the income return, and the remainder is distributed to investors (unit holders). This income is included in the investor’s tax return and taxed at their marginal tax rate. Franking credits, if derived, are passed onto investors and can help reduce tax payable.

If units are sold, this may create a capital gain or loss depending on how unit prices have changed since investment. If a capital gain is realised on units held for more than 12 months, a 50% capital gains tax discount will apply unless the units are owned by a company.

Benefits of Managed Funds: Managed funds offer several advantages that allow you to select options that suit your specific needs and objectives, including:

• Diversification: Provides a diversified portfolio across a range of asset classes and securities.
• Wide Choice of Investments: Access to various asset classes and diversified portfolios.
• Specialists: Access to specialist investments and investment styles.
• Tailored Portfolio: The ability to choose specialist managed funds (e.g., infrastructure, emerging markets, small caps).
• Professional Management: Managed by a team of professional investment managers responsible for investment selection, review, and monitoring, including risk management.
• Active Performance: Potential to outperform the index through active management.
• Low Participation Required: Requires a low level of participation and time involvement compared to direct investing.
• Regular Investments: Allows regular investments, which can assist with a “dollar cost averaging” approach and/or a regular savings plan.
• Tax Statements: Provides tax statements to assist with completing your tax returns.

Disadvantages and Risks of Managed Funds: Managed funds also come with several risks and disadvantages:

• Market Risk: The performance is affected by the assets and securities invested in. Growth assets like shares and property offer higher returns but come with higher risk.
• Limited Control: You have no control over individual investments that are bought and sold.
• Tax Management: No control over the timing of asset sales and purchases, affecting capital gains tax outcomes.
• Capital Gains in Distributions: Distributions may include a return of capital, which can be less tax-effective.
• Limited Transparency: Limited transparency of the underlying portfolio and investments, often reported with a lag.
• Higher Fees: Can have high management and administration fees and buy-sell spreads.
• Currency Risk: Movements in international currencies can influence the value of international assets.
• Gearing Risk: Some managed funds may borrow funds to increase potential returns, which can magnify both gains and losses.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.