Sunday, February 7, 2010

Managed funds Part 2

Not all managed funds make money for their investors and one point that is constantly hammered home is that past performance is no indication of future performance. The top performer from last year is rarely the top performer two years in a row.
You also have to be aware that you do not dictate where your money is invested so it is essential you choose a fund that closely matches the companies or industries you are keen to invest in.
Don't forget that managed funds attract fees and charges and these vary from fund to fund. Some charge an entry fee and no exit fee, some charge the reverse while others don't charge any fees. You need to familiarise yourself with all fees so you don't get a shock when your statement comes. The time to ask questions is before you invest.

When you get a statement from your managed fund, it will itemise your tax liabilities on the distributions you have received. Distributions comprise both income from dividends and interest and income from the sale of assets (capital gain). Dividend income is taxed at your marginal tax rate. If the dividends have been franked, you will receive franking credits. Don't forget to include the distributions you receive in your annual tax return.
You will be taxed on just 50 per cent of the capital gain component of your distribution if the fund owned the asset for more than a year. The statement does not include any capital gains you may have made if you disposed of any of your investment.

Costs of investing in managed funds vary but usually involve entry and exit fees and an annual management charge.

Entry and exit fees can range from nil up to 5 per cent depending on the type of fund you select. Cash management trusts and mortgage trusts typically have no fees. However, international shares tend to attract a higher fee. The situation of charging entry and exit fees is changing with the introduction of discount brokers (such as InvestSMART, a subsidiary of Fairfax Digital Limited) who generally rebate the fee. Advisers also tend to rebate the fee if you buy units through them.

Not all managed funds charge exit fees. Some reduce exit fees depending on the length of time you keep your money in the fund, usually eliminating the fee entirely if it is more than five years but charging around 5 per cent if it is less than a year.
Some managed funds offer lower entry fees but higher ongoing fees. If you are planning on investing for the long-term, it can be better to pay a higher entry fee upfront.

Ongoing fees
This fee is an annual charge that covers the cost of the fund manager's services, administration fees and the commission paid by the managed fund to the third party with whom you dealt with to buy into your managed fund. The Investment and Financial Services Association requires fund managers to publish a fee that encompasses all costs, so investors can more readily compare apples with apples. This figure is called the Management Expense Ratio (MER). Ongoing fees vary depending on your choice of investment. The MER on cash funds is usually much lower than the MER on international share funds. This is because monitoring international share investments involves greater input from the fund manager. The range is approximately 0.5 up to 3 per cent

Managed funds

There are several ways to invest. From 0ur studies, I realise the most viable option for me to start creating my wealth is via managed funds. I would like to start investing in property as well, but that I feel will have to be further down the track.

An interesting website to learn more is: http://www.moneymanager.com.au/investing/guides/managed_funds_guide.html.

From here, I will reproduce the following information:

Managed funds - also known as unit trusts - are vehicles that allow you to pool your money with a number of other investors into a single fund that then is able to invest in assets that might otherwise be out of your reach. Managed funds are what they say - funds managed for you by others - namely, investment professionals such as fund managers. Managed funds can invest in a variety of assets including shares, property and fixed interest or a combination of these. All managed funds have a prospectus which allows you to see where it is investing.

The attraction of managed funds is the diversification they offer. If you wanted to invest in shares but only had $1,000, realistically you could only invest in one company. If the company performs badly, you could lose your money. But if you invest that money in a managed fund, depending on the fund's profile, you may have an interest in 10, 20 or even 50 Australian or international companies. The same applies to property trusts. You may want an exposure to property in your portfolio but cannot afford to buy a house. If you invest in a property trust, then depending on the sector it invests in, you can have exposure to major shopping centres, CBD office blocks, or a leisure resort.

Investing in a managed fund also gives you the benefit of a professional fund manager. Fund managers have access to much more research than the average investor and presumably a better knowledge of investment markets. Of course, you won't necessarily have the control to choose the individual investments made by the fund manager, but with thousands of managed funds now on the market, you'll certainly be able to choose a fund that reflects your risk profile and closely mirrors the choices you might yourself have made. However, be aware that not all fund managers make money for their investors. You need to do your own research to ascertain how comfortable you are with a fund manager's approach to investing.

If you decide to invest in managed funds using a regular savings plan, because you are contributing a set amount each month, managed funds are also a simple and convenient savings vehicle.

How much do I need to invest in a managed fund?
Usually you need to invest a minimum amount of $1000 to buy into a managed fund although some let you start your investment with as little as $500, especially if you also commit to a regular savings plan where you add to your investment on a monthly basis from as little as $100.
When you invest in a managed fund, you are buying units of equal value in the fund. If the value of the investments owned by the fund rises, then so too does the value of your units. If the value of the investments fall, then so too does the value of your units. The value of the units that you have invested in at any time is the market value of the fund's investments divided by the number of units issued, less any debt. This is known as the net asset value.

Types of managed funds
Managed funds can be both listed and unlisted. Those that are listed can be traded on the stockmarket and have a market value that is determined by supply and demand. These funds tend to be closed - that is, there is a finite number of units on issue.

Non-listed funds can be either open or closed. If they are open, new units are issued to meet demand with a new prospectus released every six months or so. Unlisted funds are valued at least weekly, if not daily, by the fund manager. The value is calculated by dividing the current value of the total assets plus either the buying or selling costs by the number of issued units. If you want to sell your units in an unlisted fund, you need to contact the fund manager who will have set out in the prospectus how quickly you can access your money. It is usually no more than two weeks and often within day

Monday, February 1, 2010

What is an Investment?

Investment is the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value. [1] It is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance no matter for households, firms, or governments. An investment involves the choice by an individual or an organization such as a pension fund, after some analysis or thought, to place or lend money in a vehicle, instrument or asset, such as property, commodity, stock, bond, financial derivatives (e.g. futures or options), or the foreign asset denominated in foreign currency, that has certain level of risk and provides the possibility of generating returns over a period of time.[2]

References
1{{cite book investment is the employment of fund on assets with the aim of earning income or capital appreciation. last = Sullivan first = arthur authorlink = Arthur O' Sullivan coauthors = Steven M. Sheffrin title = Economics: Principles in action publisher = Pearson Prentice Hall date = 2003 location = Upper Saddle River, New Jersey 07458 pages = 271 url = http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4 doi = id = isbn = 0-13-063085-3}}
2 Graham, Benjamin, and David Dodd (1951). Security Analysis. McGraw-Hill Book Company. ISBN 0071448209