A managed fund, also known as a mutual fund or collective investment scheme, is a type of investment vehicle where funds from multiple investors are pooled together and professionally managed by a team of experts. In this guide, we’ll explore the key aspects of managed funds, how they work, and their benefits for investors.
Key Points about Managed Funds:
- Pooling of Funds: Managed funds collect money from individual investors, which is then pooled together to form a larger fund. This pool of funds is invested in a diversified portfolio of assets such as stocks, bonds, cash, or alternative investments.
- Professional Management: Managed funds are managed by professional fund managers or investment teams who make decisions about which assets to buy, hold, or sell within the fund. These managers have expertise in financial markets and aim to maximize returns for investors while managing risk.
- Diversification: One of the key benefits of managed funds is diversification. By investing in a wide range of assets across different sectors, industries, and geographic regions, managed funds spread risk and reduce the impact of market volatility on investors’ portfolios.
- Investment Objectives: Managed funds typically have specific investment objectives, such as capital growth, income generation, or a combination of both. The investment strategy of the fund is aligned with these objectives, and the fund manager makes investment decisions accordingly.
- Units: Investors in a managed fund purchase units of the fund, which represent their proportional ownership of the underlying assets. The value of these units fluctuates based on the performance of the fund’s investments.
- Liquidity: Managed funds offer investors liquidity, allowing them to buy and sell units of the fund on a daily basis at the fund’s current net asset value (NAV). This provides investors with flexibility and the ability to access their investments when needed.
- Fees: Managed funds charge fees to cover the costs of management and administration. These fees may include an annual management fee, which is typically a percentage of the fund’s assets under management, as well as other expenses such as trading costs and administrative fees.
- Regulation: Managed funds are regulated by financial authorities in the jurisdictions where they operate. Regulations are in place to protect investors and ensure transparency, fairness, and accountability in the management of the fund.
Example of Managed Fund:
Example: XYZ Growth Fund is a managed fund that aims to provide long-term capital growth by investing in a diversified portfolio of equities.
Scenario:
- Professional Management: XYZ Growth Fund is managed by a team of experienced fund managers who conduct research and analysis to identify investment opportunities with the potential for long-term growth. They actively monitor the portfolio and make adjustments as needed to optimize returns.
- Diversification: The fund’s portfolio includes a mix of stocks from different sectors and geographic regions to spread risk and capture opportunities across various markets. By diversifying the portfolio, XYZ Growth Fund aims to minimize the impact of market fluctuations on investors’ returns.
- Investment Objectives: The primary objective of XYZ Growth Fund is capital growth. The fund seeks to achieve this by investing in high-quality companies with strong growth prospects and holding these investments for the long term to benefit from compounding returns.
- Units: Investors in XYZ Growth Fund purchase units of the fund, which are priced based on the current value of the fund’s assets. As the value of the fund’s investments fluctuates, so does the price of the units.
- Fees: XYZ Growth Fund charges an annual management fee of 1% of assets under management, as well as a performance fee of 20% of any returns above a specified benchmark. These fees cover the costs of managing the fund and compensating the fund managers for their expertise.
Conclusion:
Managed funds offer individual investors a convenient and accessible way to access professional investment management and diversify their portfolios. By pooling funds together and leveraging the expertise of experienced fund managers, investors can potentially achieve their financial goals while minimizing risk.
References:
- Bodie, Z., Kane, A., & Marcus, A. J. (2018). Investments. McGraw-Hill Education.
- Fabozzi, F. J., & Drake, P. P. (Eds.). (2017). The Handbook of Fixed Income Securities. McGraw Hill Professional.