INVESTING IN MANAGED FUNDS

Oct 7, 2024

Investing in managed funds is an increasingly popular investment option for New Zealanders looking to grow their wealth. Whether you’re saving for retirement, planning a big purchase, or simply aiming to grow your financial portfolio, managed funds offer a diversified, professionally managed solution. However, as with any investment, it’s essential to understand both the benefits and potential pitfalls. This article explores what managed funds are, their advantages, and what you should be mindful of when investing in them.

laptop showing stocks, crossed hands


What Are Managed Funds?

A managed fund is a pool of money collected from various investors, which is then invested by professional fund managers into a variety of assets such as shares, bonds, property, or cash. These funds are designed to spread risk by investing across multiple asset classes and markets. Managed funds in New Zealand come in various types, including KiwiSaver funds, unit trusts, and exchange-traded funds (ETFs), each with different levels of risk and return.

By investing in a managed fund, individuals can access a diverse range of assets that may not be feasible to manage on their own. Fund managers make decisions about what to buy, hold, or sell based on the fund’s strategy and goals.


Advantages of Investing in Managed Funds

1. Professional Management

One of the main attractions of managed funds is that your investment is handled by experts. Fund managers have experience and knowledge about financial markets, which allows them to make informed decisions. They monitor the market daily and adjust the portfolio to take advantage of opportunities or mitigate risks.

2. Diversification

Managed funds spread investments across different asset classes, sectors, and markets. This reduces the risk of significant losses since the fund is not reliant on the performance of a single asset. For example, a diversified managed fund may invest in New Zealand stocks, international bonds, property assets, and cash reserves.

3. Accessibility for All Investors

You don’t need a large sum of money to start investing in a managed fund. Some funds allow minimum investments as low as $100 or even regular contributions through automatic payments. This makes managed funds accessible to beginners or those looking to invest small amounts regularly.

4. Liquidity

Most managed funds allow investors to withdraw their money when needed, although some may have restrictions or exit fees. This liquidity can provide peace of mind, knowing that your investment is not locked up indefinitely.

5. KiwiSaver and Long-Term Growth

Many New Zealanders use KiwiSaver, a type of managed fund, to save for retirement. Managed funds within KiwiSaver schemes allow investors to benefit from employer contributions, government incentives, and compounding returns over time.

6. Tailored Risk Levels

Managed funds come in various types, ranging from conservative to aggressive. Investors can choose a fund that aligns with their risk appetite and investment goals. For example, if you’re close to retirement, you might prefer a conservative fund that prioritizes capital preservation, while younger investors may opt for a growth-focused fund.


Potential Pitfalls of Investing in Managed Funds

1. Fees and Costs

While managed funds offer professional expertise, these services come at a cost. Management fees, performance fees, and administration costs can reduce your returns over time. In New Zealand, these fees can vary significantly between providers. It’s essential to review a fund’s Product Disclosure Statement (PDS) to understand all the associated fees.

  • Management Fees: A percentage of your investment is charged annually to cover the fund manager’s services.
  • Performance Fees: Some funds charge an additional fee if the fund exceeds a set performance target.
  • Exit Fees: Some funds impose fees if you withdraw your investment early.

2. Market Risk

Although managed funds offer diversification, they are not immune to market risks. If the market declines, the value of your investment can drop, and you may experience losses. For example, during periods of economic downturn or global events like pandemics, even well-diversified funds may see negative returns.

3. Lack of Control

When you invest in a managed fund, the decision-making is left to the fund manager. While this can be beneficial for those who lack investment expertise, it also means that you have limited control over the assets held in the portfolio. Some investors may prefer direct control over their investments through individual shares or property ownership.

4. Performance Variability

Not all managed funds perform equally. Even with professional management, there is no guarantee that a fund will meet its target returns. Some funds may underperform the market or struggle due to poor management decisions. It’s important to research the track record of the fund and its managers before committing your money.

5. Tax Implications

Managed funds in New Zealand are subject to taxes, including Portfolio Investment Entity (PIE) tax rates. While PIE rates are generally lower than personal income tax rates, investors still need to be aware of how tax will affect their returns. Additionally, changes in government policy could impact tax rates on investments in the future.


Key Considerations When Choosing a Managed Fund

1. Understand Your Risk Appetite

Each fund has a different risk level. Conservative funds invest mainly in lower-risk assets like bonds and cash, while growth funds focus more on equities and property, which carry higher risk but offer greater potential returns. Assess your risk tolerance and investment horizon to choose a fund that matches your needs.

2. Compare Fees and Performance

Use online tools like the Sorted Fund Finder to compare fees and historical performance across different managed funds in New Zealand. A fund with lower fees may not always be better if it consistently underperforms. Look for a balance between competitive fees and solid performance history.

3. Read the Product Disclosure Statement (PDS)

The PDS provides essential information about the fund, including its strategy, fees, and risks. Make sure to read this document carefully to ensure you understand what you’re investing in and what to expect in terms of returns and potential risks.

4. Assess Liquidity and Withdrawal Conditions

Some funds offer daily withdrawal options, while others may have exit restrictions or waiting periods. If you need quick access to your money, ensure that the fund you choose aligns with your liquidity needs.

5. Consider Ethical and Sustainable Investments

Many investors are now interested in ethical and sustainable managed funds that align with their values. These funds prioritize investments in environmentally friendly and socially responsible companies. If this aligns with your preferences, look for funds with clear sustainability criteria.


Final Thoughts: Is a Managed Fund Right for You?

Investing in managed funds offers a convenient way for New Zealanders to grow their wealth with the help of professional management and diversified portfolios. However, it’s essential to weigh the advantages against potential pitfalls such as fees, market risks, and lack of control.

Before investing, take the time to assess your financial goals, risk appetite, and investment horizon. Using tools like Sorted.org.nz and obtaining advice from a Financial Advisor can help you compare funds and find one that meets your needs. Managed funds are a great option for those who prefer a hands-off approach to investing, but they require careful selection to ensure your financial goals are achieved over the long term.

Ultimately, whether you’re a new investor or a seasoned one, managed funds can play a valuable role in your financial strategy—just make sure you go in with your eyes open and armed with knowledge.


By understanding the pros and cons and following best practices, New Zealanders can make the most of managed funds and achieve their financial aspirations with confidence. And of course, contact us. We’re here to help.

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