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MoneyDecember 17, 2019

Everything you need to know about managed funds

Photo: Getty Images
Photo: Getty Images

What is a managed fund and how does it work? We’re here to answer all your questions and more.

Let’s start with the basics: what even is a managed fund?

As the name suggests, a managed fund is an investment fund that’s taken care of by a team of experts. When you put money into a managed fund, it’s pooled together with money from other investors that’s then spread across different kinds of investments like bonds and shares. The fund manager then decides how to invest that money in order to get investors the best financial results. 

If that sounds familiar, that’s because most New Zealanders already own a type of managed fund – KiwiSaver. In fact, if you understand how KiwiSaver works, it’s highly likely you’ll understand how managed funds work. Don’t know much about KiwiSaver? Luckily, we have just the guide for you

Why would someone want a managed fund? 

If you’ve ever wanted to try out investing, then doing so via a managed fund can be a good place to start. Managed funds are ideal for beginners, especially if you don’t have a lot of investing knowledge. The fund manager will essentially do all the heavy lifting for you. Plus, with a managed fund, your money is spread across more investments than if you’d bought individual stocks, making it easier to manage risk. 

“You have the comfort of knowing it’s managed by a group of investment professionals, which means you don’t need to do all the research on individual stocks,” says Melissa Vasta, head of product at Kiwi Wealth.  

“Some people can get analysis paralysis [and stress themselves out when] they just want to dip their toes into investing, especially if it’s for the first time.”

It’s also a great way to get into areas that an amateur investor may not typically be able to. “The way I think of managed funds is it’s a way to get access to international markets and investments that you wouldn’t necessarily have access to otherwise,” says Vasta.

What’s the incentive?

One way of looking at managed funds is as a way of saving towards specific life goals. Much like how KiwiSaver is designed to help you save towards retirement or your first home, a managed fund can help you save towards a holiday or maybe a little something for your children in the future. But unlike KiwiSaver, you can access your investment in a managed fund at any point in time, so it provides a way to grow your money for you to use whenever you need it.

What do managed funds invest in?

That depends on the fund. Generally speaking, these funds will be described as defensive, conservative, balanced, growth or aggressive (again, very similar to KiwiSaver), or they can be focused on a particular type of investment or market such as shares, commodities or emerging markets. 

Each fund has a different level of risk (defensive with the least risk, aggressive with the most risk), so the right fund should line up with your own personal appetite for risk and how long you’re planning to invest for. Once you decide on the right risk level for you, online tools like Sorted’s Smart Investor will allow you to compare and contrast so you can pick the managed fund that best fits. 

“A lot of people just want to go for growth and get maximum possible returns. They don’t care if it takes a bit of a downward turn in the short term,” says Vasta. “But then we have people who want to stick with something more conservative which has a heavier weighting towards bonds, whereas growth has a heavier weighting towards share markets overseas.”

“We invest globally across a wide range of assets. We predominantly invest in non-Australasian markets [because] from a Kiwi Wealth perspective, we think [that since] you’ve got your house and your job in New Zealand, the focus should be on getting exposure to other markets.”

“You have the comfort of knowing it’s managed by a group of investment professionals, which means you don’t need to do all the research on individual stocks,” (Photo: Getty)

But why not just chuck my money into a savings account or a term deposit instead?

Term deposits are a popular option in New Zealand as they allow people to lock away their money and earn predictable returns for a fixed period of time. They’ve traditionally been considered “as safe as houses” when it comes to protecting our money. But there are downsides to term deposits if you want the freedom to withdraw whenever you want without being penalised, or the potential to gain higher returns for a higher degree of risk. 

Currently, savings accounts and term deposits are offering historically low rates of return, which has nudged more people to consider managed funds as an alternative. 

“With rates being so low, it’s moved people to look for other options,” says Vasta. “We’ve found people [using managed funds] that we wouldn’t have possibly found in the past if term deposit rates had stayed high.”

OK, but do I need to have a lot of money? Is there a lot of work involved?

That varies depending on the fund manager, but if you’re looking to open a managed fund with Kiwi Wealth, the minimum amount required is just $500. This is reasonably low compared to a lot of options on the market and is designed to attract everyday New Zealanders to investing. 

Once you open a managed fund, which you can do online, you can then set up regular investments starting from just $50 per payment. The rest is taken care of by the fund manager so there isn’t a lot else for you to do, really. 

So what sort of returns can I expect? And what about fees?

Returns vary, and of course, it’s impossible to predict what they’ll be like in the future. But it pays to check how different funds have performed over time to get an indication of what to expect. 

Fees vary based on the fund manager. With Kiwi Wealth, there are different fees for conservative (0.74%), balanced (0.91%) and growth (1.07%) funds. 

What sort of risks do I need to be aware of? 

If you’re investing in a growth fund, you first and foremost need to be aware that there will be volatility. Things will go up and down more frequently and if there’s a market downturn, your balance will probably head south for a period of time. 

Second, although managed funds give you the freedom to withdraw at any given time free of charge, you won’t always be able to access your money so easily. They’re not like a bank account where you can withdraw money with a click of a button – you’ll often have to give notice of a week or two.

It’s also important to be aware that funds operated from overseas may have tax or currency risks. For more information on this, visit the Financial Markets Authority (FMA) website, which also has more information on how managed funds operate in New Zealand.

What should I look out for when choosing a managed fund?

“Do your research, pick a company that you’re comfortable with, and look at what their responsible investing policy is,” advises Vasta. “In this day and age, it’s really important to make conscious decisions about where you invest, so make sure you do a bit of a comparison on fees to get a feel for what the market is in that area and what other value your provider can give you.”

“So as long as you’re in a fund with reasonable fees, I’d say you need to look at what sort of advice they can give you, if there’s someone available for you to have a chat to, and what kind of mobile access you get – the more engaged people are, the better decisions they make “

This content was created in paid partnership with Kiwi Wealth. Learn more about our partnerships here

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