Is it right to invest in managed funds?

The concept of managed fund is not new in Australia and was first introduced in 1930s. It provides investors the opportunity to dip their toe in the investment market. According to Australian bureau of statistics, managed funds have more than $1.3 trillion of investment in them. If as an investor you want to invest your wealth in one of the 12,000 managed funds then, first step is to decide whether you want to invest in active or passive managed funds.

In actively managed funds your fund manager regularly try to outperform a particular market index while in passive managed funds you buy portfolio of assets which imitates an index. Let’s look at the pros and cons of the managed fund to decide for ourselves whether it’s a good decision to invest our wealth in them or not.

1. The main advantage is that your fund is managed by an expert and professional manager who have vast knowledge of the market and how it operates. So basically your investment is in safe hands.
2. By investing in managed funds, you are pooling your wealth with other investors through a shared managed fund. This reduces the risk because of diversification which is its main attraction.
3. As you are sharing the investments with other investors, this reduces not only the cost of investment but it also allows you to invest in assets with minimum investment requirement.
4. If you invest for a longer period of time you enjoy the benefits of compounding because of investments and re-investments of your returns.

Now, let’s look at the other side of the coin;

1. You can choose the type of fund to invest but you have no control where your wealth is invested.
2. Management and withdrawal fee will be charged on your investment and that will increase with passage of time.
3. Any return that you will receive will be treated as income so it will be taxed. As a matter of fact, when you will sell your units the amount you will receive will be treated as capital gains and will be taxed again.
4. The major disadvantage of investing in managed funds is that few funds perform so badly that long term inflation rate exceed their long term yields.

Now, when we have a clear idea what managed funds are and how they work, before investing keep your degree of risk tolerance and length of investment in mind. Rule of investment is higher return will expose you to higher risk too. Try to minimize this risk through diversification which is possible if you invest in managed funds. In that way, you will get a chance to invest in big Australian and international firms, that too with minimum of investment.