So how do managed funds work, what types are available and what are the risks involved?

The Basics
When you invest in a managed fund, you're allocated a number of units based on how much you invest and the current price of each unit. For example, if you invest $5,000 and the unit price at the time is $1, you would own 5000 units.

If the unit price rises to $2, the investment will be worth $10,000 ($2 x 5000 units). Or if the unit price drops to 90 cents, the investment would then be worth $4,500 (90 cents x 5000 units).

The Benefits
Managed funds can be an effective way to make the most of your investment dollars because your contribution is pooled with the money of other investors. This delivers benefits such as:

• Asset diversification. This can help investors achieve a lower level of investment risk across their portfolio. Depending on the particular managed investment, it may invest in shares, property, fixed interest or cash, or a specific combination of these assets.
• Broader investment market access. Some markets, such as international markets, may otherwise be unavailable to you as an individual investor.
• A tailored portfolio. Your investments can be designed to suit your needs, whether you want to gain a regular income or focus on capital growth.
• Professional management of your money. A team of experienced investment managers will be in charge of your money. These managers are responsible for seeking out the best possible returns through careful selection of investments and by monitoring political and economic factors that may affect the performance of particular investment sectors.
• Professional investment administration. Managed funds are convenient for the investor because the manager handles the day-to-day fund administration.

The Returns
Here are two types of returns for managed funds: unit price growth and distribution income.

Unit price growth occurs when the value of the underlying investments in the fund have grown over the period of the investment. This results in an increase in the price of units in the fund.

Income is paid to unit holders when a managed fund makes a distribution. These are payments received during the course of your investment. They consist of the earnings the fund has generated over the period and may include capital gains (from the sale of fund shares or other fund investments) or income (from dividends or interest).

Most managed funds will give you the option of receiving your distributions as cash to your bank account, or re-investing them within the fund.

The Risks
There is a simple rule about risk which generally holds true for all investments: the higher the possible return, the greater the risk of loss over the short term. However, if you plan to invest over the long term, these risks can be reduced, even for more volatile investments such as shares.

For this reason, funds with a higher exposure to growth assets such as shares and property are best suited to those who are looking to invest for strong returns over longer time periods (greater than seven years) and who are prepared to experience short-term volatility along the way.

Funds with a higher exposure to more conservative investment types, such as Australian fixed interest, mortgages and cash, are less volatile but generally deliver lower returns.

Diversification can reduce the risk. By investing across a range of asset classes that experience good performance at different times, the higher returns you receive from one type of investment can help to offset lower or negative returns from another.

Investing in managed funds requires a medium-to-long term investment horizon, particularly those that include growth assets. Switching investments or redeeming the investment before this time elapses can result in you receiving less back than you originally invested.

The Performance
Try not to focus too much on past performance figures. Naturally, a fund’s track record is important but you do need to be careful. Simply because a fund has performed well in the past, does not guarantee it will do so in the future. This is where the quality of the management team and understanding how the fund invests is crucial, as different investment styles tend to perform differently across the economic cycle. If you would like to learn more about managed funds, give us a call.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

The post What are managed funds? appeared first on Newcastle Financial Planners & Financial Advisors.

Being a parent working towards owning your home carries with it many dilemmas. One such quandary is funding education for your children.
 

While the best option will depend on your family’s specific circumstances, two important strategies to consider are:
 

1. Direct spare cash into the home loan and use redraws to fund education costs.
 

Benefits of this strategy:
• Reduces the total amount of interest paid on the home loan.
• After-tax investment return is equal to your home loan interest rate – risk free!
• Invest amounts that are income and capital gains tax-free.
• Easy access to your cash if required sooner than anticipated with the flexibility of an offset or redraw facility available with some home loan products.
 

Problems with this strategy:
• Offset account or redraw facilities are not available with every home loan.
• Financial institution may charge a fee to redraw payments in advance.
• Could achieve lower returns than alternative investments.
 

2. Investing in a managed fund dedicated to funding educational costs.
 

Benefits of this strategy:
• Can choose a mix of assets to suit timeframe and desired investment return.
• Many funds allow regular investing which takes advantage of dollar cost averaging.
 

Problems with this strategy:
• Income and capital gains tax are generally payable on managed fund investments.
• Investments made within a managed fund are subject to market fluctuations. In times when investment markets perform poorly, returns on the fund may be low or even negative, but this is often more than offset with high returns during the good years.
• Most funds charge entry, exit and/or administration fees.
 

Other important factors to consider:
 

Investment timeframe before children start school: Managed funds are usually a long-term investment (from five to seven years plus). If your timeframe is less, investing in a managed fund is not usually recommended due to the risk that you may receive less when you withdraw the funds than you originally invested.
 

Time before retirement: Not many people want to pay a home loan with their retirement income. Generally speaking, the further you are from retirement the more sense it makes to use the home loan to fund education costs.
 

Interest rates: How much interest are you paying on your home loan? If your rate is higher than the managed fund return, it usually makes more sense to focus on paying down your home loan and invest separately in a managed fund.
 

Investing wisely: High penalty tax rates exist for income earned by minors. This makes investing in the name of a child under 18 undesirable.
 

Our team of professionals and award winning financial planners are at hand to help with any questions you may have regarding this article.
Call on (02) 4926 2300 or email us.
 

Disclaimer.
 

Funding education can be confusing, so if you’re not sure what would work best for your family, talk to us.

The post Funding education: Managed funds vs Home loans appeared first on Newcastle Financial Planners & Financial Advisors.

Exchange traded funds (ETFs) are one of the fastest growing investment instruments in the world because they offer investors a cost effective way to gain exposure to a range of domestic and international asset classes.

This article provides a summary of:

• What an ETF is
• The benefits if investing in ETFs
• How ETFs compare to other investments

Exchange traded funds (ETFs) give investors the combined benefits of managed funds and listed shares in one convenient, liquid and easy to trade investment vehicle.

• ETFs trade on the Australian Securities Exchange (ASX) exactly like shares, giving you the ability to diversify across an asset class in one easy transaction.
• The underlying assets of an ETF are comprised of a diversified portfolio of securities across an asset class which typically track an index.

Why invest in ETFs?

There are 6 good reasons to consider investing in ETFs:

• Instant diversification
ETFs provide you with the ability to diversity across an asset class through the holding of a single security. This broad investment exposure helps you to avoid concentration risk, which can occur if your investment portfolio is not sufficiently diversified across and within asset classes.

• Liquidity
Like shares, ETFs give you the flexibility to buy or sell at any time during market hours – meaning you can respond quickly to take advantage of changes in market conditions. While daily volume is seen as an indicator of liquidity for shares, ETFs benefit from Market Makers providing liquidity.

• Transparency
To ensure transparency, a full list of the underlying holdings of the ETF is provided to the market each day. This list allows you to see the exact nature of the underlying exposure, making it easy to use the ETF to complement other investments in your portfolio.

• Lower cost
ETFs are a cost effective way to gain exposure to a diversified portfolio of securities across an asset class. Since ETFs are typically able to achieve lower operating costs, the management fees can be lower when compared to other forms of managed funds.

• Tax efficiency
ETFs generally have a lower level of portfolio turnover than actively managed funds, usually changing only when there is a rebalance of the index. As a result, ETFs are more tax efficient investments over the long term because they are less likely to generate high levels of realised capital gains. Since primary market investors, such as Market Makers, purchase a large number of ETF units directly from the Issuer and offer the ETFs for sale on the secondary market, the trading of ETFs in the secondary market does not increase portfolio turnover within the ETF and this helps to keep them tax efficient.

• Returns from dividends and capital growth
As the underlying portfolio of assets changes in value, ETF units will change in value. Investors benefit from capital appreciation of the value of the ETF units and may also receive distributions that have been paid by the underlying holdings, such as dividends. Depending on the underlying securities in the ETF, investors will also receive any associated franking credits.

Comparing ETFs to other investments

To meet your investment goals, you may choose a combination of investments in your overall portfolio, including exchange traded funds (ETFs), shares and managed funds. When deciding to invest it is important to understand the features of the various investment types.

How to use ETFs in a portfolio

ETFs can be used in a portfolio to help implement a variety of strategies for different investor types.

Speak with your financial adviser about whether ETFs are right for you.

Source: Russell Investments, March 2012.
 

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