What are Managed Funds – Types, Benefits and Strategies
It is good to invest in managed funds instead of making a direct investment. Here, your money will be clubbed with funds from other investors. This accumulated amount will then be invested across various instruments and asset classes. The fund manager will select the type of investments, and each investor will own a proportion of the managed fund. Intrigued?
Read on to know what managed funds are, their benefits, the role of a fund manager and more.
What are Managed Funds?
Managed funds pool individual investors’ money, which a fund manager invests in combined capital of multiple asset classes such as infrastructure and property assets, bonds and shares.
As you make investments in a managed fund, a number of units or shares in that fund will be issued to you. Every unit or share denotes an equivalent part of a fund’s value. A fund may fetch you regular payments by way of distributions or dividends, depending on the income or profits it earns from those investments.
Investors prefer managed funds as it is easier for them to invest through it. A single transaction introduces them to a variety of underlying investments. They can diversify their investments across various market sectors and asset classes.
Types of Managed Funds
Managed funds can be broadly categorised as single-asset managed funds and mixed-asset/multi-sector managed funds. Given below are their details:
1. Single Asset Managed Funds
In this category, the funds focus on a single asset class, for example, property, bonds or shares. The following are the various types of single asset managed funds:
- Property Funds: Here, the managed funds invest in commercial properties, property developments or residential properties. Certain property funds carry high levels of risk. Such funds do not offer any guarantee of a fixed rate of interest or return to investors. Moreover, there’s every chance that one may not have the ability to pull out his/her money at short notice.
- Mortgage Funds: These funds generally invest in property loans or mortgages. Certain mortgage funds are high-risk investments. The fund’s risk factor depends on the purpose of borrowing the loan and the borrower’s creditworthiness. If borrowers pay interest, investors will receive regular income. However, an investor should remember that the value of his/her investment will not increase. Moreover, the investment value might fall if the borrowers are unable to repay the loans.
- Cash Funds: Cash funds include bank bills, short-term government bonds and money market deposits. These funds invest in relatively safe and short-duration investments.
- Share (Equity) Funds: Share funds have the potential to generate high returns. However, these funds also carry relatively high risks. These funds invest in listed companies, both domestic and international.
- Fixed Interest or Bond Funds: These funds include mortgage-backed securities, government bonds and bank bills. Certain fixed interest funds that invest in corporate bonds could have a potentially slightly higher risk. However, these funds typically invest in low-risk investments.
- Alternative Investment Funds: Generally, experts say that it is a good idea to consult financial experts before investing in alternative investment funds. This is because these are high-risk investment options. These funds contain private equity funds, derivatives and commodities and hedge funds.
2. Mixed-Asset or Multi-Sector Managed Funds
This particular category of managed funds invests in a range of investments. The investments are named based on the asset class that makes up most of their portfolio. Given below are the different types of mixed-asset funds:
- Cash: These funds invest all their money in cash or cash-equivalents like government bonds, short-term money market deposits and bank bills.
- Growth: Around 85% of the portfolio of these funds is invested in shares and real estate. The remaining percentage is invested in fixed interests or cash.
- Conservative: These funds invest only 30% of their total assets in shares and properties. The majority portion is invested in cash or fixed-income instruments.
- Balanced: These funds allocate nearly 70% of their total assets to shares and properties. The rest of their investment is in fixed interest securities or cash.
What is the Role of a Fund Manager in Managed Funds?
The most crucial task of a fund manager is to decide how to spread your investment among asset classes, namely:
- Cash
- Bonds
- Property
- International shares
- Australian shares
Asset allocation is nothing but the manner in which you divide your investment among various asset classes.
Benefits of Managed Funds
Investing in managed funds can be beneficial in the following ways:
1. Low-Stress Choice
A managed fund involves an expert who conducts detailed research on the investment options and the market before making an investment decision. An experienced fund manager with access to strong investment procedures, research and information, will manage an investor’s money. An individual investor cannot readily get a hold of such details.
2. Portfolio Diversification
Managed funds help to diversify an investor’s portfolio as it gives access to various asset classes across countries, sectors, industries, and companies. This pooled investment option allows you to access the asset classes that are not usually affordable to you as an individual investor.
Managed funds offer you exposure to a variety of assets and markets, both international and domestic. It facilitates diversification in a single trade. As such, you’ll get access to the stocks in your underlying fund. The brokerage fee is applicable to just one transaction.
Contrarily, achieving diversification through direct investments can be expensive and time-consuming. Every share purchase involves a brokerage fee. Besides, if you have limited funds, spreading your money may not be a fruitful option.
3. Regular Investment Plan
You may register for a regular savings plan or a regular investment plan under some managed funds. Here, a regular investment plan denotes that an investor can add excess money to his/her managed fund investment at fixed intervals.
A regular investment plan under a managed fund will help in building an extensive investment portfolio.
4. Offers Capital Gains
A managed fund provides income to investors and disburses capital gains as the value of the units in a fund increases.
Also Read: What Is a Dividend Reinvestment Plan?
Who Offers a Managed Fund?
There are 3 important entities when it comes to the management of managed funds. This includes the following:
- Responsible Entity: The role of a responsible entity is to oversee the fund’s operations and monitor the fund’s performance and market conditions.
- Investment Manager: An investment manager’s duty is to manage all assets of a managed fund.
- Custodian: The financial institution that is responsible for holding the investments of the managed funds is known as the custodian.
A managed fund is a registered investment scheme that operates as a unit trust. Unit trusts denote an unincorporated mutual fund structure where funds directly provide profits to individual investors who own units. Thus, investors are offered managed funds by trusts.
In India, SEBI (Securities Exchange Board of India) has introduced regulations for the structure of mutual funds, a type of managed fund. Mutual funds are operated by sponsors, custodians, trustees and Asset Management Companies (AMC).
Strategies of Managed Funds
You can utilise a managed fund in the following ways:
1. Adjust Asset Allocation
The investment returns will depend on your asset allocation. You can adjust the asset allocation from time to time for higher profits and favourable returns.
A managed fund ensures that you can conveniently adjust the asset allocation or an asset class under it through a single transaction. You can buy a Managed Fund for increasing your exposure and sell it to reduce exposure.
2. Instant Diversification
Spreading your investment across an array of shares may minimise the overall risk since it decreases the effect on the portfolio in case any of the companies underperform.
For instance, Australian shares Managed Funds offer exposure to the stocks in the underlying funds, facilitating rapid diversification to investors, even if their investments are meagre.
Limitations of Managed Funds
Keep in mind the following risk factors before investing:
1. Charges
A fund house charges several administration and management fees that can decrease your returns. Such fees may vary based on the different types of funds and different fund managers. Make sure you are aware of all the fees and associated charges before investing.
2. Fund’s Value
Prices of managed funds increase in value with time. However, the prices may also fall below the purchase price.
However, the risk involved in managed funds is lower than that of direct investment in a company’s shares. That’s because a fund manager spreads an investor’s money across different assets, companies and sectors.
Also Read: Taxation Of Dividend income
Final Word
Managed funds offer favourable returns to investors through their planned and structured approach. Some managed funds keep a low minimum investment limit for investors. So, make sure to learn all the finer details of a fund and keep your investment goals and risk appetite in mind before you invest.
Download the Navi app and start investing in any of the equity or debt schemes offered by the Asset Management Company (AMC). Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
FAQs
Yes, a cash management trust is a kind of managed investment in which the primary assets are cash securities. The pooled fund is invested in cash securities (short-term) such as promissory notes, bills of exchange and other money market instruments.
Yes, a property trust comprises collected funds that are invested in various property types such as shopping centres, hotels, industrial and residential properties. A property trust’s units are traded on the stock market, and the unit value can fluctuate over time.
An Australian equity trust is a kind of managed fund investing in only Australian shares. Such investments offer high returns and are ideal for high-risk appetite investors as the shares can be quite volatile.
An international equity trust, a kind of managed fund, invests primarily in international shares worldwide. In this case, shares are quite volatile, but they can fetch favourable returns for investors.
An agribusiness scheme is a type of managed investment that utilises collected funds to make investments in forestry, livestock or farming. Such schemes are suitable for investors with a high-risk appetite as the investments can be prone to damage from uncertain weather conditions and natural calamities.
Want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research? Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
