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 and each investor owns a proportion of the total fund. The value of the fund goes up and down each day.
Each fund has its own rules about what the fund manager can invest in. 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). You can invest in a single fund, or a mix of funds. It’s important to choose a fund that matches your appetite for risk, and your investment goals.
Portfolio Investment Entity (PIE) funds 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.
Funds that mostly invest in lower-risk assets such as bonds and cash will have more stable returns, but are not likely to grow as much over the long term. They often use names such as ‘defensive’, ‘conservative’, and ‘balanced’.
Funds that include less stable investments, such as property and shares, are more risky, but are also likely to have higher returns over the long term. They often use names such as ‘growth’ or ‘aggressive’.
1. Not all names mean the same thing
When choosing a fund, make sure you find out exactly what it invests in. A ‘conservative’ fund from one provider may invest in a different mix of assets to a ‘conservative’ fund from another provider.
2. 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 for first home buyers and people suffering financial hardship.
3. 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 the total of:
Find out what education and experience the fund manager has. 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.
Look at fund performance. Past performance is no guarantee of future performance but it can give you an idea how a fund has performed compared with similar funds, and how consistent returns have been over the long term.
Compare risk. The law 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: