Find out about the different types of managed funds

Do you have money to invest? In this article, we run through some of the managed funds available that can help you achieve your investment goals.

Managed funds in a nutshell
Individuals pool their money into a fund with other investors and, in return, receive units. Along with the value of the fund’s assets, these units fluctuate in value; however, their quantity remains the same. 

DIY or engage a fund manager? Learn about the merits of DIY investing in shares compared to actively managed funds here.

Passive or active management
Throughout the world, every stock market has an index that tracks the overall performance of a group of stocks. The S&P/NZX 50, for example, tracks the 50 largest companies on the New Zealand Stock Exchange.

Managed funds can fall into two broad categories: passive and active. To illustrate how passive and active managed funds work, imagine that the NZX50 is a giant jar filled with jellybeans of many colours — red, orange, green, yellow…

In a passive fund, the manager buys every flavour — even those that aren’t so tasty. In other words, he/she tracks the index, and then whatever it does as a whole, invests in line with it. The manager doesn’t make decisions about what to buy or sell; they just follow the index.

Conversely, in an active fund, the manager is choosy about which jellybeans to buy. So, using knowledge and insight, they invest in what they believe are the best stocks (tastiest jellybeans) and avoid the bad. As a result, an active managed fund aims to outperform the benchmark.

So, when deciding between passive or active fund management, ask yourself this: Would you like any old jellybeans or just those that a fund manager hand picks for you?

Take some of the decision making pressure away. Learn about the merits of DIY investing in shares compared to actively managed funds here.

Fees
Whether your fund is passive or active, you’ll pay a fee for the manager’s work. And, as you’d expect, active management costs more because the manager doesn’t blindly follow an index. Instead, they use their expertise and insight and spend time on activities like researching companies, studying annual reports and meeting with company management.

Choosing a managed fund
Here are some things to consider when choosing a managed fund:

• Investment objective — what are you wanting to achieve?
• The desired rate of return — the higher the targeted returns, the higher the risk, so things may turn out worse than expected.
• Appetite for risk — can your nerves handle larger drops in the value of your fund from time to time?
• Available time — how long have you got to reach your investment goal?

• Domestic equities: These include well-known listed companies that trade on the NZX and ASX.
• Global equities: These are companies listed in off-shore stock markets, and they number in the thousands. Examples are the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE). Investment in global equities provides exposure to a broad range of markets and sectors that may not be well represented by domestic equities.
• Fixed interest: This is often an investment in government or corporate bonds that yield a set level of interest for a defined term. Fixed-interest investments can be in domestic or international bonds and fixed-interest securities. The expectation is that you'll get back the amount you put in plus some interest. Active managers also try to generate some additional capital growth. Interest rates typically determine the value of fixed-interest funds.
• Cash: Not really cash, this is investment in term deposits and short-term bonds.