Investing basics: how to buy a managed fund
Investing in a managed fund is one of the best ways to diversify your investment portfolio, and gain access to skilled management. But buying one can be tricky.
Buying a managed fund is a lot like going in on a group gift or joining a co-op, allowing investors to combine their cash and buy the expertise of a professional stock picker. By pooling their money together, managed fund investors can invest in a much broader range of stocks or bonds than they could if they were trying to go it alone – either because it would be too expensive, or certain assets are not available for sale to individual investors.
Want some help? Ask your adviser
If you feel unsure about the process or want some help selecting the right fund for you, a financial adviser can help you select the right options to help you achieve your personal investing goals.
Financial advisers often use a digital investment platform to organise their clients’ investments and purchase managed funds. Asset managers create funds which are sold via these platforms. For example, the ANZ OA IP-Vanguard Growth Index EF is a managed fund offered to advisers, via the ANZ OneAnswer platform.
The advantages of working with an adviser are clear: You have someone helping you make sometimes complex financial decisions, taking care of paperwork for you, monitoring fund performance, and encouraging you to stick to your investment time horizon instead of cashing in for an around-the-world jaunt or bailing when the market crashes.
However, this service isn't free. If you work with an adviser, you'll have to pay a fee, either a fixed amount based on hours worked, or a percentage of your invested money.
Be aware that managed funds recommended by an adviser will be part of their approved product list and purchased via the platform the firm uses. This means that if you want to buy a fund which doesn't appear on the list, or via the selected third-party platform, the adviser may have trouble assisting you in purchasing it.
Another challenge is finding an adviser with whom you work well, and understands your risk tolerance and financial dreams. It is also important to find one who matches your appetite for involvement – do you want to totally outsource, or find an adviser who is willing to take the time to teach you about investing and your portfolio?
Go it alone – direct investment
If you find yourself with the time and inclination to take total control of your investments, you can choose to go it alone without the help of an adviser. While DIY investing can be rewarding, it is not a simple process.
Buying units in a managed fund can be done directly via a paper application form – this means downloading the form via the asset managers website, printing it, filling it in, signing it and sending it via snail mail.
The forms themselves are also a challenge. The Bennelong Funds Management application form, for instance, is 27 pages long, and this is not unique to them.
Details required include personal details – name, age, address, the provision of identification documentation – drivers' licence, passport, taxation information, and the provision of signatures and declarations.
All copies of identification documents you provide must be certified a person authorised to do so. The process is akin to applying for a residential lease – frustrating.
In terms of payment, while there isn't a standardised process, most asset managers accept cheque or direct credit transfer.
Some asset managers allow investors to apply to invest online, but after you've filled it out online you need to print, date and sign it, and send it back. Newer direct to consumer products are fully automated, using digital processing and verification to speed up the application process.
But, there are several advantages to going it alone. Firstly, you won't have to pay an adviser for making the purchase on your behalf – or, which can be more galling, in times when there is no trading activity. Secondly, doing it yourself means you'll be afforded a complete transparency and knowledge of your transactions and holdings.
mFund – a new way to access managed funds
But wait! There is an alternative. Launched in 2014 by the Australian Securities Exchange, the mFund service allows individuals to buy and sell unlisted managed fund through their broker, the same way as you would trade shares. The service uses CHESS – the ASX's electronic settlement system, to automate and track the process of buying and selling units in funds and does not require you to complete paper application forms.
Ian Irvine, the ASX's head of customer and business development, says the main saving experienced by the investor is time.
"We estimate that for an investor, investing in a portfolio of 10 unlisted managed funds could take up to 20 hours of manual work," he says.
But with mFunds, "investors no longer have to complete lengthy application forms and post them into the manager to issue units ... Investors also don't have to worry about 'time out of market' waiting for their posted application forms to arrive at the fund manager for processing."
However, there are some drawbacks. Notably, big-bank owed broker CommSec, which according to Investment Trends controls almost half of the retail broking market, is a hold out.
Seventeen retail brokers including nabtrade, Macquarie, CMC stockbroking, UBS, Bendigo Invest Direct and Bell Potter distribute managed funds through their services. According to the ASX, more than 200 managed funds are now available to investors via 66 managers.
The costs of purchasing funds via mFund can also vary, depending on which broker you use. Be sure to shop around for the best deal. The fund you want to access may not be offered via mFund, which will leave you once again, filling out forms.
There are also questions surrounding its take-up amongst retail investors. While not a comment on the quality of the service, approximately 75 per cent of mFund use comes from financial advisers who "see the ASX as an efficient way to build a diversified portfolio for their clients." It could come down to an issue of awareness and education. Activity is growing, however. In the year to April 2018, average monthly transaction was up 59.8 per cent to 1,398.
More in this series
• Investing Basics: How to build and invest your emergency fund
Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.
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