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