Investment funds

How these funds work

Managed funds and ETFs are a portfolio of assets (kinds of investments) that are chosen by a fund manager. This makes it a good way to get started, as they research and select the investments for you. These funds are typically diversified from your very first dollar, which makes it much easier to spread your risk compared to picking individual shares.

Some funds (managed funds or ETFs) are set up to automatically follow a benchmark index like the S&P/NZ 50 or the S&P 500. These are called ‘index’ funds. The fund manager typically sets up the fund to follow the index by buying and holding company shares to match the index, but then is more ‘hands off’.

From the investors’ perspective, managed funds and ETFs are pretty much the same, as they are pools of investments held on investors’ behalf. The value of a managed fund is typically calculated only at the end of the day. ETFs are a bit different in that the units of the fund, which is what an investor owns, are listed on an exchange. (See below for more on units.) They can be bought and sold throughout a trading day, so their value is determined by what investors are willing to pay for them at a particular time of day.

Why your fund balance goes up… and down

When you put money into a fund, you’re buying units. Units are a way of keeping track of what we own in that fund. These units are linked to the assets our fund has invested in, such as shares, commercial property or bonds.

Think of the fund and its underlying investments like a big fat orange – and our units as a segment of that. When the orange rises or falls in value, so does the value of our segment.

Unlike a savings account, where we’re setting money aside, in funds we are buying things that have value. That orange can be priced higher on the market at some times, lower at others.

When we look at a savings account balance, we rightly think about how much we have. Not so with our fund balance. When we look at that, what we’re really seeing is how much our fund’s investments and our corresponding units are worth  – what their value is right now.

Instead of asking ourselves how much we have in a fund, we should be asking, “How much is my fund worth at the moment?” Might be higher, might be lower. Investment returns can be positive or negative.

The value of your units will often rise over time, giving you a return and growing your money (a capital gain). But there is always the risk that their value can drop below what you paid for them. The investments in the fund become worth more or less as markets go up and down, which means our balance will follow suit.

Especially over the long-term, fund values are generally expected to grow. So the idea is to stay in for the long term and ride out any ups and downs. When markets are down, it can feel like you’re losing money, but it’s only on paper. The loss only becomes real if you panic and suddenly withdraw your money.

What to consider when investing in funds

Actively managed vs passively managed funds

When you’re choosing which fund is right for you, you’ll find that some funds are active and some are passive (because they track an index), and many are a mix of both.

Active funds have managers who aim to get the best results by choosing investments that they think will beat the market and trading them. This generally makes them more expensive, to pay for the manager’s time in researching and trading costs. But if the manager is successful the higher returns could be worth these fees.

Passive funds simply invest to match a market index, and in turn its performance, without the fund managers specifically choosing individual investments and trading often. So passively managed funds are also known as index funds. For example, a fund might hold the same investments as an index of shares. This generally makes them cheaper, and you’ll find passively managed funds among the lowest-cost funds.

Keep an eye on fees

If you’re browsing through funds on Smart Investor, you’ll be able to sort and compare them based on the fees charged. Also, the returns shown are all after fees have been taken out. This is particularly important, since even though fees are shown in tiny percentage amounts, they can add up to tens of thousands of dollars, especially over long periods.

In the world of investing, paying more does not necessarily get you more. Cheapest is not always best, but higher fees paid to your fund manager will cut into your pot of returns. And while we can’t predict what future returns will be like, we can see what the costs will be. If you’re curious, see our KiwiSaver fund finder, which forecasts fees over time and will give you an idea of how they can add up.

Does your fund fit your values? How to invest ethically

If it’s important to you for your money to be invested according to ethical or sustainability values, check the investments the fund holds to make sure they’re a good fit.

Funds must provide a Statement of Investment Policy and Objectives (SIPO) that explains what the fund is trying to achieve and the rules about what the fund can and cannot invest in.

They often also have a responsible investment policy that will show how they manage environmental, social or governance risks, and whether they exclude certain investments to do so.

You can contact your KiwiSaver or fund provider to find out more.

If you are aiming to invest your money ethically, or to contribute to sustainable goals and companies, Mindful Money helps you understand what investments managed funds hold and whether they align with your values.