Wealth Creation Strategies Part 5: Direct investments v’s managed funds

Direct investments relate to investments that have been made directly to the market. These types of investments include the purchase of direct shares on the Australian stock exchange, listed property trusts, Government notes, bonds, direct property and debentures.  These types of investments are available for direct purchase to individual investors such as you, however, there are some considerations in making direct purchases.There is a lack of diversification in investing in one type of stock.

For instance, purchasing one particular share does not give appropriate exposure to various sectors of the market, let alone diversification between sectors within the share market. A substantial cash outlay is required if appropriate diversification is to be obtained via investing directly.Investing directly in the market can be of benefit for experienced investors with large sums of money, special interests, ambitions of self-management and special opportunities.

It would however be more advisable that direct investments, primarily shares, be used to add value to a portfolio of investments predominantly made up of managed funds.

Advantages of managed funds:

Cost efficiency

The cost associated with investing in managed funds is relatively cheaper than investing directly. For instance, investing in the share market, most stockbrokers will charge between 1.5% and 2.5% for every transaction made (i.e. Buy, sell, switch). Total direct property costs to buy, sell, hold or manage will, if properly accounted for, easily exceed total unit trust costs. Managed funds will generally have an entry or exit fee on products.

Diversification

With managed funds, it requires a small amount of money (as little as $1,000) to gain some exposure to the various sectors of the market and dozens of individual stocks. Investing directly requires large sums of money to gain a wide variety of exposure.

Professional management

Investors in managed funds have professionals working on their behalf making the appropriate investment decisions. The investor does not need to have a detailed knowledge of the investment markets, property and tenant problems, rights issues etc.

Liquidity

Funds can be accessed from unit trust funds generally within 5-10 days after making a request. Access to capital in direct investments, particularly property, can be very difficult, costly and time consuming. Managed funds have a major advantage over direct property investments, in that you don’t have to sell the whole investment to access some capital – it is virtually impossible to sell one room of an investment property.

Types of managed funds:

There are several asset classes and managed funds can be used as a means to invest in any one (or a combination) of these assets. The types of managed funds include:

Capital guaranteed

This type of fund guarantees the capital you have invested will not fall in value. Depending on the fund this may or may not apply to the total balance (total balance includes interest credited to date). The long-term return of these funds is influenced by the fact these funds generally hold the majority of their funds in cash and fixed interest with a smaller portion in growth assets and performance is expected to lay at a point between cash and capital stable investments.

Cash and fixed interest

These funds usually invest in securities (i.e. bills and bonds) issued by financial institutions including banks, Government and semi-Government authorities. Cash funds are suitable for short-term liquidity requirements and emergency needs while fixed interest funds lend themselves well to a source of regular interest income.

Capital stable funds

The majority of funds within a capital stable fund are invested via cash and fixed interest while a smaller proportion is usually held in shares and property to stimulate growth within the fund. Even though these funds typically share a similar asset allocation to capital guaranteed funds they usually out-perform them based on the fact they do not incur the cost of the guarantee.

Balanced funds

A balanced fund, as the name suggests, invests across the entire spectrum of asset classes (usually weighted towards growth assets) with the aim of reducing risk while maximising long-term return through the use of diversification. The investor must be aware these funds are generally subject to a higher level of volatility than the above types of funds yet long-term performance is expected to be higher.

Sector specific funds

These funds will generally invest in only one asset class except for holding some cash to meet liquidity requirements. They are used to access growth assets directly without having exposure to other asset classes within the fund. As these funds allow an investor to be ‘over-weight’ in an asset class there is the potential to achieve a higher level of return and in-turn, experience a higher level of volatility.

For assistance in helping you create your own wealth creation strategy to help you realise your goals and achieve financial freedom contact us today by either telephone 03 9542 3200 or email blog@freedomfinancialplanning.com.au  

WARNING: The information contained on this website is provided in good faith. While the contents are obtained from various sources that are deemed reliable, it is not guaranteed as accurate or complete and should not be relied upon as such. It is recommended that you seek independent, professional advice before implementing any of the suggestions to ensure that it is appropriate to your needs and circumstances.

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