Investment funds the pros, the cons, the basics
Investing in the stock market can be daunting for first time and even more experienced investors. There is another option - funds. We provide a straight-forward overview of how funds work and how you can invest in them.
You’re interested in investing for the long-term, but with so many options, where should you start?
The Australian stock market is likely to be on your list, but with the amount of choice on offer, selecting the right stocks can be daunting. An often overlooked consideration is the amount of effort involved to research each of the companies that you are looking to invest in.
This raises three questions: do you have the time (and inclination) and do you have the right knowledge?
If yes, then great.
If no, there could be another way – managed funds.
What is a managed fund?
A managed fund, or fund, is an investment that allows a number of people to pool their money. An investment specialist, called a fund manager, uses the money to buy a wide range of investments. This could be just shares or it could be other types of assets, such as bonds or property. The investments may be held in one country, such as Australia or may hold investments across several different countries to access opportunities not readily available in Australia and provide a greater level of diversification.
There are two key advantages to investing in a managed fund rather than by yourself:
- Managed funds are managed by experienced investment specialists (fund managers) who make investment decisions for you after undertaking thorough research and weighing up the options;
- It can be less risky than investing in single stocks and shares because your investment is diversified across all the different investments held in the fund. Basically, by diversifying across different assets you’re not putting all your eggs in one basket.
You can select the type of fund you want to invest in based on your goals, the amount of risk you’re willing to take and the fees you’re willing to pay.
What do managed funds invest in?
Funds can invest in a range of different asset classes including shares, corporate bonds, government bonds and commodities. Here’s an overview of the basics.
- Country-focused stock market funds - some investors feel more comfortable investing in countries they know more about which is why some fund managers offer funds that only invest in a particular country.
- Global stock market funds - these funds tend to spread your money around, often in line with the size of the world’s largest stock markets. They might invest 45% of your money in the US, 10% in Japan, 6% in the UK, and so on. An advantage to this might be that you’re not reliant on the fortunes of one country.
- Multi-asset funds - are normally a mix of shares and bonds. The theory is that bonds and shares often move in different directions (although this is not always true) so holding them together can help diversify a portfolio.
- Property funds - this is not typically the way most of us think of property investment. These funds usually invest in commercial property – shops, offices, factories, warehouses, etc. Some property funds own the properties outright, others invest in companies that invest in property.
- Fixed Interest funds – these funds can invest in government bonds, semi government bonds, corporate debt, or sub investment grade debt, to name a few options. Funds that invest in these types of investments may be lower risk that equity-based portfolios and provide potential protection for a portfolio if investment markets fall. They can also offer a source of reliable income.
What types of managed funds exist?
Funds can be listed or unlisted.
Listed funds are either listed or quoted on the stock exchange (e.g. ASX and Chi-X) and issue investors with securities that can be traded throughout the day.
Popular types of funds include Exchange Traded Funds, Listed Investment Companies, Listed Investment Trusts:
- Exchange Traded Funds (ETFs) – ETFs are a type of investment fund that can be bought and sold on a stock exchange. There are passive ETFs which track an asset or market index or an active ETF which tries to outperform the market they are tracking to achieve an investment objective.
- Listed Investment Companies (LICs) – LICs are incorporated as companies on a stock exchange. They have an external or internal manager who is responsible for managing the company’s investments. They are closed-ended which means they generally don’t issue new shares. LICs are taxed like any other company but have the ability to pay franked dividends. It is important to seek advice from your taxation adviser regarding the relevance of this to your personal situation.
- Listed Investment Trusts (LITs) – LITs are similar to LICs however are incorporated as trusts. LITs don’t pay tax but pay out income to investors in the form of distributions which carry the franking levels allocated by the underlying investments. It is important to seek advice from your taxation adviser regarding the relevance of this to your personal situation.
LICs and LITs often trade at a discount (or sometimes a premium) to the value of the underlying assets. ETFs on the other hand typically trade in line with the value of the underlying assets.
Unlisted funds issue you with units and are not traded on any exchange. Unlisted funds usually have a price available once a day when the value of the underlying assets is known.
You can access listed funds through your financial adviser, a stockbroker or accountant. Unlisted funds can be accessed via all these channels as well as directly through the fund manager.
How do I invest in a managed fund?
As there is a wide variety of choice available in managed funds, both unlisted and listed, Schroders suggests that you speak to your financial adviser who can provide you with more information about the options available and recommendations on the funds that are best suited to your individual investment situation in helping you meet your financial goals, whatever they may be.
This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). It is intended solely for wholesale clients (as defined under the Corporations Act 2001 (Cth)) and is not suitable for distribution to retail clients. This document does not contain and should not be taken as containing any financial product advice or financial product recommendations. This document does not take into consideration any recipient’s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at www.schroders.com.au or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at www.schroders.com.au. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group. The material contained in this document is not intended to provide, and should not be relied on for accounting, legal or tax advice. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. To the maximum extent permitted by law, Schroders, every company in the Schroders plc group, and their respective directors, officers, employees, consultants and agents exclude all liability (however arising) for any direct or indirect loss or damage that may be suffered by the recipient or any other person in connection with this document. Opinions, estimates and projections contained in this document reflect the opinions of the authors as at the date of this document and are subject to change without notice. “Forward-looking” information, such as forecasts or projections, are not guarantees of any future performance and there is no assurance that any forecast or projection will be realised. Past performance is not a reliable indicator of future performance. All references to securities, sectors, regions and/or countries are made for illustrative purposes only and are not to be construed as recommendations to buy, sell or hold. Telephone calls and other electronic communications with Schroders representatives may be recorded.