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For those who aren’t aware, managed funds and mutual funds are basically the same thing—the only difference is that the term ‘managed fund’ is more popular in Australia. According to the Australian Bureau of Statistics (ABS), the managed fund industry in Australia is worth over $3.49 trillion as at June 30, 2018.

Investing in managed funds is one of the easiest ways for inexperienced investors to own an investment portfolio without the need for large capital and extensive knowledge about investing. There are, however, over 8,000 managed funds that actively operate in Australia, including pension and super funds, and it would make sense for beginner investors to experience difficulty in choosing the best fund for their needs.

Here are some essential things every investor should know about managed funds:

Types of managed funds

There are four types of managed funds in Australia: Equity, fixed-income, multi-sector and multi-manager. As their names imply, equity funds and fixed-income funds invest in a collection of equity and fixed-income assets, respectively. Multi-sector funds invest in a mix of equities and fixed-income assets which are allocated according to certain categories such as conservative, growth, balance and aggressive. Multi-manager funds, on the other hand, invest in a collection of managed funds.

The different kinds of managed funds may also be listed or unlisted. Listed funds may be purchased in the Australian Securities Exchange (ASX) while unlisted funds may be purchased from fund managers or through the ASX mFund platform. The ASX also offers ETFs as an alternative to traditional managed funds,

How do managed funds pay?   

Managed funds make distribution payments to its investors, but different funds have different payment schemes. It’s important to understand your fund to know when you can expect distribution payments.

While some funds pay out distributions on a regular basis, others simply reinvest distribution payments so that fund members could earn interest off a higher principal amount. The redemption process and schedule may also depend on whether the fund is structured as an open-ended or close-ended scheme.

Choosing a managed fund

There are thousands of managed funds in Australia and each one functions according to its objectives. It’s important for investors to properly understand the type of managed fund they choose.

There are several things to consider when selecting a fund, but the most important is that the fund’s objectives must be aligned with the investor’s own objectives. Another important factor is to select a fund that charges manageable fees—the managed fund calculator of ASIC’s Moneysmart can help determine the impact of fees in potential returns.

For more information on how to choose a managed fund, view our Ultimate Managed Fund Checklist.

Can managed funds be passively managed?

Just like mutual funds in other countries, managed funds may be managed using active or passive management strategies depending on the fund’s underlying assets and objectives.

An example of passively managed funds are index funds like the ASX200, which simply tracks the performance of the top 200 Australian companies. Since the underlying assets are automatically selected and require little effort from fund managers, investors who purchase index funds usually pay smaller fees.

Actively managed funds, on the other hand, usually aim to outperform the market. Active funds charge higher fees because they require fund managers to make investment decisions to outperform the market.

How are managed funds taxed?

In general, managed funds are not taxed within the vehicle because distributions are made before any tax is applied. This means distribution income is added to each investor’s assessable income and the tax applied to it depends on the investor’s marginal tax rate. Fund managers may also pass on tax-free and tax-deferred amounts which are only applied when the investor sells their investment. The implications of capital gains tax on managed funds depend on the structure of the fund, however, investors still bear the tax liability.

Managed funds structured as listed investment companies (LICs) are already taxed at the corporate tax rate of 30 per cent, which means only investors with higher tax brackets need to pay additional tax. Investors with a marginal tax rate of 30 per cent don’t have to pay tax on their distribution income while those with lower tax rates may request for a refund on the difference.

Are managed funds safe?   

All investments carry risks, but just how safe are managed funds? The answer depends on the investor.

As already mentioned, the managed fund an investor chooses for their portfolio should be aligned with their objectives. This means investors need to understand and be open to the risks that a fund is exposed to before buying units in it.

For the most part, managed funds are safer in the sense that the underlying assets are managed by professionals who are well-versed in the investment market and trained in risk management strategies. But while some funds promise exceptional returns, they also come with increased risk exposure. It’s up to the investor to determine if the risks are acceptable because the safety of their investments may be compromised.

If an investor plans to invest overseas, experts advise choosing a managed fund rather than directly investing in an overseas market.

Are managed funds worth it?

Holding managed funds is a good way for beginner investors to dip their feet in the investment market without worrying about their every move because professionals do the work for them. In 2015, the second annual SMSF Insights report by the UBS and the Financial Services Council revealed that investors chose to invest more in managed funds than cash and term deposits—with the amount invested in managed funds increasing to 25 per cent from 2014’s 15 per cent. This only proves the popularity of managed funds as a way to enter the investment market.

Also, it costs less to own units in a managed fund than to purchase their underlying investments individually.

However, investors have thousands of funds to choose from, which is why identifying their investment objectives is crucial before enrolling in any fund. Likewise, it’s important to weigh the advantages and disadvantages of managed funds in relation to their investment goals.