Managed funds enable you to invest in different types of assets, even if you don’t know much about investing. KiwiSaver schemes are managed funds.
What are managed funds
When you buy units in a managed fund, your money is pooled with other investors’ money and is spread across different kinds of investments. A manager chooses how the fund is invested according to the rules set out for each fund and each investor owns a proportion of the total fund. You can invest in a single fund or a mix of funds.
Understanding the risks
It’s important to choose a fund that matches your appetite for risk, and your investment goals. Some funds invest in only one type of asset (such as property), while others spread the risk across different types of assets (for example, bonds, shares and property).
These are the funds that mostly invest in lower-risk assets such as bonds and cash. They are likely to have more stable returns but not likely to grow as much over the long term.
‘Growth’ or ‘Aggressive Funds’
These are funds that mostly invest in higher-risk assets such as property and shares. Their returns are likely to be more volatile over time, but they are also likely to have higher returns over the long term.
Portfolio Investment Entity (PIE) funds
They are a type of managed fund offered by banks that offer investors lower tax rates. There’s usually a penalty for accessing your money early, or in some cases, early access may not be possible.
Overseas managed funds
Investors in New Zealand will soon be able to invest in overseas managed funds through the Asia Region Funds Passport arrangement. This arrangement simplifies cross-border marketing of managed funds across certain countries in the Asia Pacific region.
It aims to create a regional market for collective investment schemes, making cross-border offerings easier across Australia, Japan, Republic of Korea, New Zealand and Thailand.
Under this arrangement, funds are registered in their home country, but follow the same set of agreed rules as other passport funds registered in New Zealand. New Zealand investors may benefit from the broader and more diverse fund offerings but should take tax advice and be aware of currency differences.
If you invest in any passport funds, you should receive an information sheet and a Product Disclosure Statement (PDS) to provide you with information about the organisation offering the fund, where it was registered, and any fees and charges payable.
Not all funds allow you to access your money easily
Some managed funds allow you to sell your units daily, while others have less frequent options. You may also have to give notice. This can be days or weeks. For KiwiSaver funds, your money is locked in until the age of eligibility for NZ Superannuation (currently 65), with some exceptions.
Fees can have a big impact on return
Fees are paid out of your investment and can have a big impact on your total returns over the long term. It’s worth comparing fees from more than one manager before you invest. The fees calculator on Sorted will help you do this.
Active funds (that aim to outperform an index), tend to be more expensive than passive funds (that track an index) because they require more investment expertise.
Funds report how much they charge for their services, as a total of:
management and administration charges
performance-based fees – for achieving a return that’s better than the target return
other charges – for example, member fees.
How to reduce risk
Make sure your provider is licensed by us. A licensed provider must meet the minimum standards required by law, and we monitor them.
Their success depends on their skill at choosing investments, particularly for actively managed funds, and knowing when to buy and sell. It can be a warning sign if a fund has a high turnover of managers.
Monitor fund performance
Past performance is no guarantee of future performance but it can give you an idea of how a fund has performed compared with similar funds, and how consistent returns have been over the long term.
New legislation requires providers to use a risk indicator to show how volatile a fund is (how likely it is to go up and down in value). You will find this in the product disclosure statement (PDS) you get before you invest, and in fund updates. The risk indicator makes it easier to compare funds but it only covers volatility risk, so it’s important to read the full PDS to understand any other risks.
Check your fund update
Each quarter (or at least once a year), your fund manager will publish a fund update. This information will help you keep track of your investment and will include:
the fund’s risk indicator (how likely it is to go up and down in value)
returns over the past five years
the fees charged in the year to date
how the fund was actually invested compared to the intended mix
the top 10 investments that make up the fund.
Compare and choose managed funds on Smart Investor