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Managed Funds or Direct Shares


Managed Funds or Direct Shares

As with many investment decisions, your personality, combined with your financial goals and needs, will largely determine whether you are suited to being a lone wolf on the investment scene, or whether you need the security and support of running with the pack.

If you don't have an interest, ability or the time to study the markets and keep abreast of current movements, then the decision to take advantage of a managed fund is obvious. The hard part for you is to decide which fund, or funds to go with.

However, if you are keen to research the markets and want to plan your investment strategies, you can be torn between direct involvement in your personal investment ambitions, or trusting the choices of a fund manager.

What are managed funds?

The life of a managed fund begins with a fund manager, which is usually a life insurance company, bank, stockbroker or specialist investment manager.

The manager puts together a prospectus that details all of the legalities of the proposed fund's operations. The prospectus then has to be registered with the Australian Securities and Investments Commission (ASIC), the financial regulator, after which the manager can make the prospectus available to the public. In return for lodging an investment form, which is found within the prospectus, you are issued with units in proportion to the amount you have invested. Please refer to the managed fund guide.

Your money is then pooled with the money from other investors and is used to buy the investment as detailed by the fund managers.

Apart from cash management funds, which focus on generating income, most managed funds attempt to produce mainly capital growth which is what is required to maximise your wealth in the long term.

The pros and cons of managed funds

Fund managers take care of administration issues such as processing dividend payments, assessing offers of rights issues, tax reporting and account keeping. The analysts and managers of a fund represent a body of expertise that generally can't be matched by the individual investor.

Because they have a wide information base, the fund manager has the opportunity to change the weighting of particular asset classes to try and adjust the fund to take best advantage of the prevailing conditions in the financial markets. The fund manager's sourcing of information is often highly advanced because analysts have direct access to management of the companies in which they invest.

By pooling money in funds, investors get a more diversified portfolio, which helps to reduce risk, Also, income paid out through the trust is likely to be mainly tax-free due to the dividend imputation benefits.

There is an argument that says very large funds are limited in their investment choices because of the volume of capital and shares involved. Unfortunately, some fund managers may be influenced by the greed of other investors, and they may concentrate on the more speculative end of the market in an attempt to gain greater returns. This kind of action is taken with no consideration for the long term investor.

Similarly, some fund managers may only be in the business to make a quick buck. It is a good idea to protect yourself from shonky investments by investing in a fund or trust that has links to a large financial institution, or that has a long and respected track record.

It is also possible to see how the fund you may invest in has performed in the past. Also, it is possible to see the track record of the fund manager by accessing systems such as Morningstar, however access to these systems are typically costly. It may be appropriate to request such information from the fund.

What is direct share investment?

Direct share investing or direct ownership is when you buy shares on the Australia Securities Exchange as an individual. You are also able to maintain the portfolio in line with your personal investment plan. You can indulge in doing market research and develop opinions entirely on your own, or alternatively, ask for some financial advice from your broker. However, at the end of the day, the decisions that are made regarding the investment portfolio are made by the individual investor, with only his, or her, interests and goals in mind. Please refer to the "Benefits of investing in shares" guide.

The pros and cons of direct investing

By investing in shares directly, you have complete control over where, and in what quantity, your money is invested at all times. The spread across stocks, or asset classes, can be entirely customised to suit your personal investment needs. On the downside, you as an individual investor, will have to take care of the legalities of investing, as well as tax reporting and account keeping. As an individual it is likely that the amount of money you have to invest is limited and this may mean that you cannot achieve an effective diversification to reduce risk or raise returns to your satisfaction. The extent of your personal knowledge is not as deep as the combined resources of a managed fund team of financial advisors and investment managers.

Who invests in managed funds? Who invests directly?

Managed Fund Investor Profile

For the majority of people a managed fund would be a better option than trying to do things for themselves. Especially for those that have had little or no exposure to financial markets, "even if they had the time and inclination it could be dangerous for them to go it alone". Fund investors are happy to leave dealing with the complex issues of keeping up with regulations, tax, following the markets and then making and implementing the appropriate changes to the professionals. They tend to be older and more appreciative of the convenience of the managed fund, and often have smaller amounts to invest.

Direct Share Investor Profile

There are probably two categories of people that are likely to directly invest themselves.

There are those who are genuinely good at it, professional traders, and there are others with the time and the interest, and enough knowledge and commonsense, who would be quite capable of managing a portfolio, for example retirees who are ex-financial industry professionals are suited to direct investment. They are also often younger people who like to be in control of the portfolio, have the confidence to be a risk taker, and may well have more to invest than the average unit trust investor.