Understanding managed funds

A managed fund is a vehicle that pools the money of many investors to create a diversified portfolio. An investment manager buys and sells assets on behalf of the investors; individual investors own units in the fund, and the unit price is directly linked to the value of the underlying portfolio.

Managed funds enable you to select an investment that matches your objectives, but leave the day-to-day management of the investment to a professional.

Managed funds are run in accordance with their investment policy, which mandates which asset classes, geographies and sectors the fund manager may invest in; funds can only invest within the stated bounds, so you can feel confident in the type of assets the fund you select will invest in.

When you invest in a managed fund, you are buying units or shares that represent your interest in the fund. In Australia, most managed funds are set up as unit trusts, in which the ownership stake for each investor is represented by the number of units held.

The money of many unitholders is pooled together and used to purchase investments that are in line with the fund’s investment policy. Most funds are actively managed, meaning the fund manager is constantly monitoring the fund’s investments, and buying and selling the underlying assets in line with their expectation of market movement, in order to maximise your returns.

The value of units will change in line with the value of the fund’s underlying investments, and so each unitholder participates proportionately in the gain or loss. Unitholders may receive:

• Income: from their investment in a fund through regular distributions, which they can choose to reinvest in to the fund or receive as cash
• Capital gains: if they sell the units at a higher price than they were purchased at
  

One of the most important things to remember about managed funds is that they are simply an investment vehicle; each fund will invest in different assets, and the commonality between all managed funds is that their composition is determined by the fund’s investment policy.

This means that investors are able to choose from a wide array of managed funds, ranging from highly-specialised through to general. The investment policy of managed funds is often based around one or more of:

• Asset class: funds will define what asset classes they can invest in, and when mandated to invest across multiple classes may also provide percentage ranges for different asset types
• Geography: funds may specify which markets and regions they will, or will not, invest in
• Theme: you can invest in funds dedicated to a specific investment theme, for example agribusiness or clean energy
• Return profile: some funds are dedicated to earning a particular type of return, for example a focus on generating a regular income stream

It is important to note that not all funds are actively managed – you can also invest in passive funds that mimic the composition of a specified investment index.