At some stage in their life many people find themselves in a position to save and invest. They may have surplus income or a windfall gain such as a gift or inheritance. Initially it goes in the bank. If there are no near-term plans for the money it could be invested longer term to earn higher returns.
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Some people are experienced and comfortable investing in shares and investment properties. Others don’t know where to start. They haven’t bought shares before and don’t know which ones to buy. Committing to a single property and borrowing a large sum to finance it makes them nervous.
Professionally-managed funds are a practical solution for many people. They allow investment in shares and property in small amounts.
You don’t have to be an expert. They also allow investors to diversify into other well performed areas such as government bonds, overseas shares and commercial property.
Managed fund accounts are easy to set up, from $5,000 or less usually. Large or small amounts can be added at any time. A regular savings plan can be added using an automatic bank debit of at least $100 per month. Money can also be withdrawn easily in any amount at any time.
The fund prospectus sets out where it will invest and what it offers. A team of professional managers work full time to identify attractive investment opportunities to buy into.
Fees range from 0.3 to 1.0 per cent per annum or more. Returns vary and some aren’t so good but the better managers usually earn higher than market averages after deducting their fees.
Savings plans are an ideal way to accumulate a large amount over a long time, as is needed for future school or university fees, or that big world trip.
For example if earnings are six per cent per annum an initial $5,000 plus $200 per month will grow to $41,800 in ten years.
Investment gearing is also available using managed funds. Money can be borrowed against property to invest in them. Alternatively margin lenders will lend against managed fund investments without any other collateral. They will even lend on a small, regular instalment basis.
If in the previous example we add an extra $200 per month of borrowings the total after ten years will be $74,600 with a debt of $24,000 against it. Interest is payable along the way but it is tax deductible.
Managed funds are similar to the super funds most people are familiar with but don’t have the restrictions, or as many tax benefits. Adding gearing increases their tax efficiency. With the lower limits now applying to super contributions non-super managed funds are likely to become more popular.
