Investing in the share market can be daunting, especially when you are left to your own devices for investing your money. Though we all know that investing is often the key to making money.
Take me for instance, I invested a fairly hefty sum of money (for me anyway!) in the share market in 2008. Not long after, we had the big down turn (GFC)– leaving my shares at nearly 50% of their previous value. I was utterly gutted, I felt so terrible. Some shares even got wiped out of the market completely never to return.
While many of my shares would eventually go back up, it was all rather scary as I didn’t trust my knowledge and nor did I really know what I was doing. I guess it was about this time that I realised I needed some help with my investing and started to look at managed funds. Someone whos job it was to understand investments and risk, as opposed to little old me, newspaper reading dreamer who is essentially just gambling in the share market because I know I ‘really should have some investments’.
This is where managed funds can come into play. Though they can be just as risky as shares, they are typically pooled together with other peoples money and invested in diversified assets by a fund manager that should know what they are doing.
So what is best? Managed funds or investing in shares yourself? While I cannot answer that question for you, I can outline the pros, cons and reasoning behind each.
What are you doing with your money to invest at the moment?
What is a managed fund?
Put simply, it is an investment that is managed by a financial expert/team, or qualified individual who’s job is too utilise the money within the Managed Fund for the sole purpose of providing a return on investment.
Managed funds work on the basis that each fund has a particular goal or desired risk factor. Some funds are high risk with potential for higher returns, while others are low risk managed funds and in turn most likely provide stable yet lower returns.
The investment house/individual you choose to go with, will decide what risk category your fund falls under, and the percentage split of what the fund will invest in. The purpose of splitting the investment areas is to diversify the investment as a whole and allow it to grow without to much correlation to any one investment area.
The old ‘don’t put all your eggs in one basket‘ philosophy.
An example of how a managed fund might be split:
- 45% Australian Shares
- 20% Cash
- 20% US Shares
- 15% Bonds
This split up shows that a managed fund is diversified amongst multiple assets – with the major share in the Australian share market.
Why are managed funds popular?
Managed funds are popular because people don’t need to make their own decisions when investing. They rely on the fact that an established market leading investment house will do so for them. Other reasons include:
- You don’t need a lot of money to get started. You can often begin with as little as $1K + a regular investment plan.
- Its simple to diversify your investments. The investment house does this for you with the split up of the fund you buy into. Whether they split it amongst asset classes, industries, sectors, countries or companies.
- Fund managers have access to investments the everday investor doesn’t.
- You have experts managing your money 24/7. These professionals should be making good decisions with nothing but your return in mind. They should be focused on your next steps.
- Re-investing is easy. You can re-invest your earnings through compounding. This can add up over many years!
- You can easily setup a regular investment plan that will see your initial investment amount grow. This could be weekly, fortnightly or monthly and would see you buy more ‘units’ into your managed fund.
- Your investment can be used to generate income or growth – and in some cases, both! The returns you get from a managed fund usually come in two forms. Income (paid to you as a ‘distribution’) and capital growth (achieved only when the unit price increases in value).
- You can invest smaller sums of money then that of the share market. Eg; you can purchase batches of units from as little as $1000 in some funds. Managed funds allow you to access certain investments at a fraction of the usual cost. This is because you share these costs with other members of the fund rather than having to pay the minimum investment fee on your own.
The pros and cons of managed funds
While there are numerous pros and cons associated with any form of investing, here are some of the top level basics when it comes to managed funds.
Pros of managed funds
- Low start-up costs
- Expert management
- Regular investment options
- Potential to earn income or to reinvest
- Choice of risk levels that you feel comfortable with
Cons of managed funds
- Set-up fees around 4% on joining
- Ongoing costs around 2% per annum regardless of performance
- Possible exit fees
- May be hard to withdraw money at short notice in some instances
Investing in shares yourself
To invest in shares directly, you will need to open an online brokerage account with your bank or trading partner. This will give you access to the share market and allow you to buy shares, sell shares and manage your portfolio online. Most of the time there is a minimum share purchase price of $500 for many Australian companies.
Buying shares youself has both positives and negatives, it will let you execute your own ideas which means you are the one responsible for your money (which is the case even with a managed fund, however you will need to be confident in your investing decisions).
Pros of investing in shares on your own
- Low start-up costs.
- You can choose what to buy and when to sell.
- Generally stays ahead of inflation over the long term.
- Dividend reinvestment schemes let you grow your shares.
Cons of investing in shares on your own
- Limited ability to diversify.
- Subject to market forces.
- Subject to high risk.
- Brokerage fees on share trades.
- You need to know what you are doing.
- Minimum investment value of $500 (not always).
- You need to trust your investment ideas/your own thoughts.
Using a DIY share strategy & managed funds together
Instead of choosing one or the other, why not start an investment strategy to hopefully make money by utilising both forms of investments?
This means you could have a share portfolio of your own and a managed fund that you regularly contribute to. For instance, I personally have a portfolio of shares and my strategy is to invest $5,000 a year every year until I die. A form of forced savings and investment in one.
I am also looking to open a managed fund that would see me invest a few hundred dollars per month for the next 10 years to help save for my sons education. Once again a forced form of savings.
Using this two part investment strategy will see my money invested with professional (managed funds) in areas that I may not otherwise be in, while my share portfolio is in companies that I trust and value and I can foresee been here in 20 years time.