When it comes to investing, there is a myriad of choices.
Even within different pools of investments, such as non-property investments, there are different asset classes. Within liquid assets, there are Australian and overseas equities, bonds, term deposits and cash.
Drilling down further, within equity markets, there are three main ways investments can be made:
- Investing directly in stocks
- Investing via an exchange traded fund (ETF)
- Investing via a managed fund
For the layperson, it can be confusing at best. To understand which would work best for you, let’s go into some detail and understand the respective benefits and drawbacks of each equity market investment.
Directly investing in stocks
This is a concept that is pretty straightforward to understand. You take an amount of money and purchase individual stocks directly.
While there is enormous freedom of choice in doing so, there is a downside.
With a limited bucket of money, you are limited by the amount of stocks you can buy. With greater exposure to single stocks, the potential to be affected when things don’t go well is also greater.
An analogy I like to use is putting all your money into a property only to find that plans have been made to build a rubbish tip right next door. It’s something over which you have no control and your investment is likely to be negatively affected. You are exposed.
The take away? Investing in equities this way is offers plenty of freedom, but a strong stomach for exposure is necessary (and having a lot of cash to start with will help you get a bigger spread of shares).
In simple terms, a managed fund is one that takes your money and pools with other people’s money to buys shares.
Managed funds have a number of benefits, not least of which is they reduce your level of exposure to individual stocks (meaning you get more of them to share the love!) .
They work by collectively buying shares, which as an overall fund, are managed by a professional fund manager – you are relying on their investment philosophy and expertise to pick shares that will generate a positive return.
It is important to note the distinction between managed funds and and ETF, in that managed funds do not trade as a stock in their own right, i.e. they don’t have a share price. If you are investing in a fund manager, (an example might be Colonial or BT), the investment is in the fund, not in the company.
Other benefits associated with managed funds are:
- It is not necessary to purchase a minimum subscription of stocks, as it is with individual shares (you will just need to pay attention to the minimum investment of the fund – which can be as low as $1,000 initial investment).
- Funds provide consolidated reporting, a big plus when completing your tax return. Rather than receiving the multiple individual reports that are generated by each stock (when you’re purchasing directly), a fund manager will generate a single consolidated report, making it a single go-to source of information.
- A high level of investment knowledge and skill is not required, as to a large degree, you are relying on (and paying the) fund manager to do this for you. Although you can’t sit back and relax completely, you also don’t need to spend your days monitoring every movement of a stock on the market.
- There is ample choice when it comes to choosing a fund. What this means is if you’re after a fund with an aggressive growth strategy, you’ll find one. Equally, if you’re comfortable with more conservative growth, you’ll find a match for that approach as well.
And the drawbacks?
There are always a few and depending on your appetite for risk and control, you will swayed either closer to or away from a managed fund as an investment option.
As a function of someone doing the heavy lifting for you, there are fees involved. Make sure you are clear about what these are before launching into a managed fund.
Another drawback is you have minimal control over the stocks that are purchased by the fund. For example, if you’re absolutely against smoking and your fund is invested in tobacco companies, you won’t be able to tell your managed fund to exclude them and keep everything else – you will need to look for another fund (or accept that they will invest in something you may not like).
The take away for you?
If you’re considering a managed fund, do your homework. It also pays to consult with a trusted source, such as your financial adviser, who will have knowledge of funds with a proven philosophy and track record and consider this in light of your own personal circumstances.
And finally, what about ETF’s?
An exchange traded fund is a listed stock on the stock exchange that invests in stocks on the stock exchange. Sound confusing? It’s not really.
An ETF is like any other stock, with its own stock code and trading price. It applies a different kind of thinking in that it will invest in a certain group of stocks, doing so as a stock itself.
Examples of an ETF are the ASX 200 and the ASX 20.
If we take the ASX 200, it is comprised of the top 200 companies, by market capitalisation, trading on the Australian stock exchange. At any given time and depending on individual stock’s performance, the companies in this traded group will change.
For example, Dick Smith may have once traded within the ASX 200, however as the company’s performance diminished, it would have dropped out of the group, making way for other companies with a better market capitalisation.
This is a big plus for an ETF, because your exposure to stocks is significantly reduced, whereas if you’d invested in Dick Smith directly and not reduced your exposure in time, you would have lost money on that particular investment.
The big downside for an ETF is that as an investor, you have zero control of the stocks purchased.
The take away?
If control over the stocks that are purchased is important to you, consider a different investment vehicle to an ETF. While they are cheaper to run and directly match the market in what is performing well, your criteria for control won’t be met here.
What’s the wrap up?
To answer the question of whether a managed fund is for you, there are clearly multiple considerations. As always, we recommend you consult with your financial advisor before committing to an investment pathway.
Have you invested in a managed fund? What has been your experience of them? Has it worked for you?
Share your thoughts in the comments below. And if you’d like more detail, contact Rothgard directly. We are happy to discuss your individual investment needs.
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