Instead of investing directly and doing it all ourselves, we can invest in a managed fund where our money is pooled with other investors’ money and spread across different kinds of investments. A fund manager chooses the investments, and each investor owns a portion of the total fund.
Managed funds can be a great way for beginners to wade into the waters of investing, as it doesn’t take much to get started. Managed funds also make it easier to manage risk by spreading our investments across a range of assets and products. KiwiSaver is a good example.
With a managed fund our money is spread across more investments than it would be if we bought an investment such as a share or property directly.
We can earn income from managed funds as well as getting capital gains when the value of our units in the fund rises.
The manager chooses investments according to the fund’s rules. The manager is paid to administer the fund, and choose the investments. We don’t need to have in-depth knowledge – the beauty of managed funds is that we can take advantage of a fund manager’s expertise.
Managed funds may have a general focus and be described as defensive, conservative, balanced, growth or aggressive funds. Or they can be focused on a particular type of investment or market such as shares, commodities, or emerging markets.
It’s a good idea to choose the kind of assets or markets we want to invest in first and then find a suitable fund manager that specialises in that type of fund. When we invest in KiwiSaver, we’re putting our savings into a type of managed fund.
Managed fund prices will often rise in value over time, giving investors a capital gain. There is a risk that the price of a fund can drop below what we paid for it.
The risk of losing all our investment can be smaller than if we personally invested in shares in one company, because our money in the fund is spread across many different assets and organisations.
There is also a risk that the various management and administration fees charged by a fund will reduce our returns. Fees can vary greatly between different fund managers and between different types of funds.
There's more on the Financial Markets Authority website about fees and how to protect ourselves when investing in managed funds.
We can buy managed funds directly from the management company or sometimes on share markets such as the NZX.
Funds are usually priced in ‘units’. After buying units in a fund it is usually possible to switch between funds with the same manager if you decide you want a different type. Contact the manager when you want to sell your units and get your money back.
KiwiSaver investment funds are generally locked in until you turn 65 (or after five years if you join after the age of 60) or withdraw your savings to buy your first home, but you can switch investment funds or scheme providers at any time.
Buying managed funds instead of individual investments spreads risk and requires less work than investing directly.
Portfolio investment entity (PIE) funds are managed funds that have special lower tax rates. When you invest in a PIE, the tax on the income from your investment will be based on your prescribed investor rate (PIR).
The PIR is worked out on your taxable income in the last two income years and may be lower than your marginal tax rate.
For example, if you normally pay tax at 33%, you will only pay 28% on your income from a PIE fund.
The Inland Revenue website has more detailed information about PIEs and PIRs.