Managed funds can make it easy for you to invest. However, there are thousands of managed funds on offer, so choosing the right one for you can sometimes be confusing.
Investing in the industries or asset classes you’re familiar with can be a good place to start. You can choose to invest in a single asset class, such as global shares, or a specific sector, such as mining. This might however mean that your returns are more volatile, with the potential for big gains one year and losses the next. Alternatively, you can invest in a mixed asset or multi-sector fund. These are labelled according to the types of investments that make up the majority of the portfolio.
As with any investment, a higher expected return usually means higher risk. One of the best ways of reducing your risk and smoothing out your investment returns is investing in a diversified portfolio that includes a mix of assets (such as shares, property, cash and bonds) as this can help smooth out ups and downs in particular sectors or asset classes.
It is important to consider your risk tolerance and investment timeframe and choose an investment that reflects this. Do some research so that you are comfortable with your choice before committing yourself.
You should check the product disclosure statement before you invest. It provides information on the product’s key features, fees, commissions, benefits, risks and the complaints handling procedure. Funds will charge a range of fees for managing your money and small differences in fees can have a substantial effect on your returns in the long term. These charges include entry and contribution fees, management expense ratio, performance and adviser service fees.
You can use ASIC’s MoneySmart managed funds fee calculator to compare the fees and projected performance of each fund.
It is recommended that you look at the fund’s performance over the past five to seven years. This may give you an indication of how it will perform in the future. You can also compare the performance of the managed fund against an index fund to see if it’s keeping pace with the relevant market. However, remember that past performance is not a reliable indicator of future performance.
For more details on how to buy and sell managed funds visit ASIC’s MoneySmart website.
Greg Medcraft is Chairman of Australian Securities and Investments Commission