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Benefits and risks

The benefits of using managed funds include the ability to gain exposure to different asset classes and market sectors.

As with all investments, managed funds carry risks. You should carefully examine the investment strategy, asset allocation and the manager’s track record before investing.

Benefits

Diversification

Managed funds allow you to access a diversified portfolio made up of different asset classes and industry sectors. This can reduce your level of investment risk by minimising the impact of poor performance by a particular industry or industry sector.

Potential wealth generation

A well-chosen managed fund, used individually or in conjunction with other investments, can create a portfolio to assist your efforts to generate wealth.

Cost-effective investment

Investing in a managed fund is as affordable as investing in shares. You can start investing with a relatively small amount, adding to it cost effectively over time.

Access to a range of assets

Managed funds can provide access to assets that can assist with portfolio diversification but which you may not otherwise be able to invest in due to factors such as:

  • financial limitations (such as shopping centres),
  • market access (such as international shares) or
  • where it is difficult for individual investors to gain research, information or insight to performance (such as small or micro-cap stock or those within emerging markets).

Geared exposure

You can use managed funds as part of a geared investment strategy, such as margin lending. Many managed funds are on the list of ‘approved products’ against which margin lenders will provide loans. Some managed funds employ gearing within the fund.

Risks

Underperforming investments

While investing in managed fund gives you access to different asset classes and industry sectors, there is always the risk that the fund’s investments may underperform or decline in value, affecting your return.

Specialised funds

Some managed funds invest in specialised areas in an attempt to exploit potential high-growth opportunities. You may be taking on extra risk if you invest in a fund focused on a narrow section of the market.

Fees

Managed funds can charge fees for the professional management of the fund. Managers charge these fees in a variety of ways:

  • as a fixed percentage of the value of the fund – as the fund size grows the dollar amount paid increases
  • as a fixed cost of the managers’ services to the fund – if the fund grows and the managers’ cost remain static, the proportion of fees as a percentage of the fund declines.

Some fees are deducted from the fund assets – ie the fund’s value, others are deducted from income earned before it is paid to investors as a dividend or distribution.

These fees can reduce the overall return you receive from your investment, especially if the fund underperforms.

Asset class risks

Certain asset classes that managed funds hold may carry their own risks. For example, if a fund invests in international shares, its value may be affected by currency fluctuations.

Premiums and discounts

Listed investment companies (LICs), listed investment trusts (LITs) and hedge funds often trade at a premium or discount to the value of their underlying assets.

This value is usually referred to as the fund’s net tangible assets (NTA). A fund’s performance is usually assessed on a combination of the performance of the underlying investments, and the market premium or discount of the fund itself.

The on-market price of an LIC or LIT is closely related to its NTA, but is ultimately determined by supply and demand.

LICs and LITs are required to report the value of their underlying assets, as expressed on a per-share basis, to ASX as a market announcement by the end of the 14th day of each month. ASX then compiles and publishes the premium and discount information on a monthly basis.

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