Choosing an LMI

The following process may be useful in making an investment decision:

1. Establish a goal

Knowing your investment goals is critical to finding the right managed investment. A recent study of managed funds investors revealed the following goals: 

  • 84% to fund retirement
  • 26% to pay for education
  • 9% for current income
  • 7% of to buy a home. 

Your goal should include a timeframe and an idea of how much money you need.

2. Understand the risk/reward trade-off

A truism of investment is that with greater returns comes greater risk. The risks of a managed investment come largely from the asset class the fund focuses on. Your risk profile and investment goals will determine what types of investment are appropriate. If you have a longer timeframe and are prepared for short-term market declines, you may consider whether products with a higher risk/return profile are suitable. For investors who have a short timeframe or a low tolerance for losses, lower risk products are generally more suitable.

3. Research the products

Find those products that fit your goals and risk profile. Collect information on the managed investments that interest you. Educate yourself about how the products work, what they invest in and their level of risk and return. Once you have identified those products that suit your needs, you can consider other factors such as fees, performance, and tax.

4. Understand the value of diversification

Managed investments can be an excellent way to hold a diversified portfolio within a single investment. However, it is also important to spread your investments across multiple asset classes, thereby limiting your exposure to any one type of investment.

5. Factor in fees and taxes

The fees and taxes you pay on managed investments can be significant. You need to understand what you are paying, how it will affect your returns, and possible strategies to reduce these costs.

6. Choose your Listed Managed Investments

Match your goals and time frame to the  appropriate Listed Managed Investments.

Listed Investment Companies may be appropriate for investors seeking:

  • A diversified portfolio through a single investment
  • Returns from both capital appreciation and income
  • A tax managed investment with relative consistency in returns
  • Concentrated exposure to a specific investment sector

Australian Real Estate Investment Trusts (A-REITs) may be appropriate for investors seeking:

  • Regular income with exposure to real estate assets
  • Diversification into one or more types of commercial property
  • Returns from income and capital appreciation
  • An income stream with a tax deferred component
  • Capital stability with relatively low volatility

Infrastructure funds may be appropriate for investors seeking:

  • A investment with low correlation to price fluctuations in other asset classes
  • Diversification into infrastructure assets
  • Income stream with a tax deferral component
  • Capital stability of earnings from essential goods and services

Pooled Development Funds (PDFs) may be appropriate for investors seeking:

  • Diversification into small Australian companies
  • A tax effective long term investment
  • Exposure to companies at a formative stage of development
  • Potential high returns with high volatility
  • Concentrated exposure to one industry

Exchange Traded Funds (ETFs) may be appropriate for investors seeking:

  • Diversification in a single investment
  • Exposure to additional asset classes
  • Surety of pricing relating to the value of the assets held in the fund
  • A cost and tax effective investment
  • Investment in the components of an index or an actively managed portfolio

Absolute Return Funds may be appropriate for investors seeking:

  • Potential returns in rising and falling markets
  • Diversification into non-traditional financial instruments and management techniques
  • An investment with low correlation to Shares, Property, or Fixed Income
  • Returns from both income and capital appreciation.