Jess: Kia ora my name is Jess. I'm in the external communications team here at the FMA. Today, I'm joined by Tom Hartmann from sorted.org.nz, and we are going to talk to you about managed funds. Thank you for joining me today. So, I thought before we get into what managed funds is, could you just give our audience a little introduction to you and how you got into the world of finance.
Tom: Yeah, sure. So, my story, you can hear it from my accent that I'm from America. I grew up in in New York City and I lived in California for a while before moving here to New Zealand. I married a Kiwi who's from here in Wellington, and we have, three kids.
My background is in journalism. In print journalism, but somewhere along the lines in California, I worked for the mortgage industry as well. And so, I have a background in finance and once you start to understand how mortgages work and how messages are delivered and how communication works, and you put those two things together, you get sorted.
Our work on sorted.org.nz, which is put out by the Retirement Commission is basically aimed at helping people grow their money and get to the best possible position by the time they hit retirement, and then to make savvy decisions along the way before and after that. And so, when the role came up, it brought together the two things in my background and helped make sense of all the different experiences I had before.
Jess: Awesome. Today we're going to focus on managed funds. Could you start by just telling me what a managed fund is? because I only learned like last week that KiwiSaver was a managed fund, which is slightly embarrassing, but that's okay, I'll own it.
Tom: Not at all. Actually, on our guide about managed funds, we just have this big box that comes out and says, actually KiwiSaver is a managed fund.
Yes. And might be more accurate to say KiwiSaver as a system uses managed funds right. To help grow your wealth. And manage funds, what they are, and we can just call them funds, here actually they don't need to be because all funds are managed by someone. There's always a professional behind it. They're just pools of investor money that are then invested by a professional fund manager and buy assets and in terms of asset, assets is like a bit of a technical word, but let's just say the best thing way to think about an asset is something that you buy that puts money in your pocket.
If you think about most of the things you buy. They take money out of your pocket. And those are liabilities. And an asset instead is something that can grow in value. And that can be either because somebody will pay more for it after it grow, it becomes more valuable, or because it spins off in income itself.
So, if you think about a. Let's talk about shares. Just for a moment, a share is a slice of a company. When you buy a share, you own part of a company. But a company, what it does is it makes money, obviously, right? It offers a good or a service and makes money. And so over time, it obviously, it, the idea is that it would get better at that and make more and more of a profit, serve more and more people and make more of a profit.
So, when you own a part of that. Ideally those shares should go up over time if the company is increasing in value So the investment and the company should increase in value. And some companies, they pay dividends over time, which they take part of the profits, and they give it back to the investors.
That's another reason why a share can increase in value. And so a managed fund is just a pool of money that invests in assets like shares. Like bonds and bonds are more like debts. Okay? Bonds are, so when you, if you lend money to a government, if you lend money to a company or even a local council, it might be in the form of a bond and that bond would pay you interest.
Your money, when it goes into a fund that, holds some bonds, is being loaned out and is growing in value because of that interest. On top of that. So, there are lots of advantages to managed funds. I'm sure we're going to talk more about them. But just think of them as a pool of money from lots of investors.
And they're buying things that can increase in value over, over time.
Jess: And could you talk a little bit more about how they work? 'cause often with KiwiSaver it's set up for you, which is great. You're easily set up for KiwiSaver. Are all other managed funds similar in how they work?
Tom: Yeah, so there's an incredible variety of managed funds out there, but we don't really need to think too much about all those varieties. Like I don't think we need to talk about every single type of managed fund that exists in the world but KiwiSaver is a great place to start because maybe a lot of our audience, and you and I are, actively involved in KiwiSaver.
Therefore, we are investing in managed funds. Now, you're right, a lot of it is set up for you in the sense that it's money we don't even see it's being invested, right? And that money is coming from three places. The money we make, the money our employer puts in, and the money that the government puts in, for example, if we're employees, but a managed fund that's not KiwiSaver, it's pretty much the same thing.
In fact, a lot of KiwiSaver providers, they have the same fund. And one is KiwiSaver because it's got restrictions about being locked up for either retirement or for your first home. And it's got the exact same fund next to it that's non-KiwiSaver. And it's exactly the same thing, but it doesn't have those restrictions.
And this is one of the key things about managed funds that we want to get across here is that you can get your money out whenever you want. They are what's called highly liquid, meaning always with investing, you're putting your money into something. It's one of the key questions how hard is it to get out?
When you invest in a property, for example, a residential property. It's not really that easy to get your money out because you gotta put your house on the market. You gotta find a buyer. You get lots of other people involved in terms of, evaluations, all sorts of other things. And then you sell the house and then that's the moment you get your money back with managed funds, actually, it's just like a withdrawal from an a savings account in a bank.
Jess: Is it better though to leave it there and not withdraw it until you actually need it, rather than. I guess if you're in a financial situation where you need it, you can withdraw it, which is lucky. But it's probably best to leave it. Don't touch it. It'll increase in value over time?
Tom: I think like overall, It's a really good thing when you don't need to get back your money in a hurry with the investing. But one of the ways I like to explain investing is you're actually going shopping. For something, you're not just putting money in an account like in a savings account.
You're actually going shopping for these things called assets and you going shopping for shares. So you could think of a good way to look at it. And you can think of your fund manager as your personal shopper, as somebody who does the shopping for you. Hey, that's pretty cool, right? You've got a personal shopper and they can go out there and find good investments.
Good things to, to pull in. In anything that you invest in, you don't want to have to sell it in a hurry. Like for example, if you're in a jam financially and you need to sell your house, the market might not be in a great place. Like the market's coming down a lot now, if somebody's selling their house, maybe they're taking a loss on.
So like it's, you don't want to be forced to sell. Yeah. Usually with investing, it's a really good thing in managed funds to know that you can get your money out if you, need to. Because people's circumstances change, but also we're investing for specific things, right?
This is a really important thing to ask, so why are you investing? What's that on goals? What's that money for? Because lots of times you talk to people who are interested in investing. I just want to get rich. I just wanna that, that's actually not specific enough to make good investing decisions.
Like you need a, in terms of the goal, say if you're investing for your kids' education, that's 18 years away, or if you're investing for your car, a new car that's five years away, or if you're investing for a new home that's maybe seven years away, you would invest in a different way for each of those types of goals. So you can't really make good choices unless you know what that money's for.
Jess: So, it's always a, it's always a good thing to do your research first. You don't have to know everything, but. There are some great tools out there, which we'll get to at the end. I know you spoke a little bit about not touching on every single type of managed funds, but could you talk about the main ones that if someone is interested in managed funds, what for a new investor like me, which ones should we be looking at?
Tom: Yeah, so what are you doing when you're investing? You're taking money, you have you are putting it at risk. And when you put it at risk in this capitalist system that, that we have, you can expect to be paid a return to get something back for doing it. That's why we're investing.
To tell the kids, you ask the kids what's money for? And they say it's for spending. It's for buying this. Actually, it's for growing too, so everybody should have part of their finances that's growing over time. And one of the best ways to grow money is managed funds.
So instead of talking about ETFs and index funds and all this, I want to talk about five different types of funds and then based on what it holds inside, and these are, maybe you've heard some of these terms already in the KiwiSaver world. Like for example, a balanced fund. Okay. So, a balanced fund is usually the traditional one is one that holds, half of it is shares and half of it is bonds.
Okay, so that's sort of balance between the two. That's why it's called now if you start to invest in things that are a little more risky. Again, we're putting money at risk. Yeah. So, if you want to dial up your risk in order to potentially get a better reward, then you start to go towards a growth fund.
Yeah, and then if you want to dial it all the way up, then you get to something called an aggressive fund. And we're not talking about what kind of investor you are. We're talking about the fund that it's invested in an aggressive way, and that'll hold a lot of growth assets such as shares and commercial property. So that's one way of dialling up the risk. But say if you don't want to dial up the risk, you want to dial a little bit less. Okay. From balance, you can dial it down into conservative. Funds, which hold more bonds and less shares in commercial property. And then there's even defensive funds, which is basically holding more bonds and cash in the bank.
So it's much more even like a term deposit. So, there's chances of those going down in value is very low compared to an aggressive fund, which can bounce all over the place. And so, this is the other difference about why I like to tell people it's like going shopping. Because say, if you and I went to the market right now and bought a pun of strawberries which happened to be in season, it's a little bit more like that. So, if you think about those strawberries at different times of the year, those strawberries are worth more and worth less depending on what season we're in. If you get some good strawberries in the middle of winter, they're going to be worth more than you gonna pay for it. Because they're imported, because, and different reasons right now, they happen to be cheaper. And that happens with our investments too. So, for example, in a fund, if you go get a basket of shares at different times, depending on what kind of shares they are, they're gonna be worth more, they're gonna be worth less.
And so, when you look at your account, when you've got money in your managed fund, you're not looking at how much you have. Okay. You are looking at how much things are worth at a given time. So, when we're buying into a managed fund, we're buying units much like those strawberries, and we buy a certain, just like that punt of strawberries that the number of strawberries doesn't change, but the value of them goes up and down.
Okay, so that's what's happening with managed funds. Basically, you're buying units and units go up and down, and that's why when we look at our accounts and generally things in the investing world have the potential to go up over time, but at different times you can see ups and downs in value, especially on the aggressive end, of the spectrum that are all over the place and so much more risk. But again, the potential for much more return. Yeah, especially if you have time to write out the ups and downs.
Jess: Could you talk a little bit more about the pros and cons? To investing in a managed fund? Maybe we start with the pros or the positives.
Tom: Yeah. There, there's lots of pros and some of them we've talked about already. One is the ability to get your money out. That's a big one. You don't have to look far these days to find somebody investing in crypto, for example. I thought it was a really good idea and couldn't get their money out.
So, this is a major thing. Another one is this ability to dial up or down your risk. You can find literally a type of managed fund for any of those five different types. And we're talking about, and in those five different types, from aggressive to growth, balanced, conservative, defensive, there are a number of funds, maybe hundreds of funds in each of those buckets.
So, there's a lot to choose from. Okay. So, there's a huge variety. That's a good thing. But when you're putting your money at risk. You don't want to have all your eggs in one basket, so you want to be able to spread your risk. That's called diversification. That's about if the, if you think about those underlying companies, if you're investing in shares, if one of those goes down, you don't want to have all your money in that one company because you're at risk of losing it all. But if you're spread about a hundred companies, some will do well, some will drop off some will be able to grow your money over time without relying on the fortunes of a single company or even five companies.
For example. So those are some of the pros. It's really you get professional management, meaning that there's a team of good people who are working on this, who have a track record and who know what they're doing, who are taking care of the admin. And you don't have to. For example, do research on individual companies.
You don't have to know about given markets. Say if you're investing overseas in the American market, for example, you don't need to be an expert on. It's good advice, like you don't have to know everything. Especially with the managed funds, like you say, someone's managing it for you.
So that's that extra kind of, yeah. Safety net. Now since we're talking about safety, another really good thing about it is that there's a separate company for each of these providers, for each of these fund managers called the supervisor and a supervisor. And they're companies like the Public Trust, like Guardians Trust, who basically watch, they're the watchdog of the fund manager.
And they are basically checking to make sure that the fund manager is doing what with your money, what they say they're gonna do with their money. That adds a level of safety. Then on top of that, since you have the regulator, like the FMA, looking over the system, and actually this is a highly regulated area in managed funds and KiwiSaver in particular, to make sure that money is safe and invested where it should be.
So that's a real advantage in managed funds, that you're not just going out there and like buying shares on your own of a company. So, lots of advantages. Here's another one. It's a little bit more systemic. So, if you're drip-feeding money into a managed fund, one of the greatest things is I mentioned how you're buying units back to those strawberries, right?
When you're investing money a little bit at a time, which most of us do, as opposed to saving up a lump sum and dumping it all in. What happens is because the value of those units is going up and down, a cool thing happens. The money you put in, when those units are worth more, when things are more expensive, you end up buying less units.
Which is good. You don't want to spend more on units than you need to, but when they go down in value and you're putting the same amount of money in, you're buying more. So, we've got a system where you're getting more bang for your buck when values go low because you're putting in pretty much the same amount of money.
So, anybody who sets up like a, an automatic payment into a managed fund to save up, save for the next car or something like that, is getting a good deal depending on where the market's going like this, but you're actually buying more units when things are low and less units when things are high.
Clear advantage in managed funds. If you want to do like sustainable investing Yes. And want to invest, for example, in in water companies or something like that, you can find a managed fund. That's just a aim. Oh, wow. I didn't aim that. There are all sorts of, so it's almost like lots of things if you try to dream them up, okay, I want to invest sustainably, or environmentally in this way.
Chances are there's a fund that A fund, yeah. It's really easy to see where your money is, where it's invested, and you get regular reporting on it. Oh, wow. That, that's really cool. And the documentation on it is all standardized. It's all through legislation. All the disclosure docs are in a certain way.
They're easy to find on our website, for example. So there's a lot going for it in terms of transparency too, in terms of managed funds.
Jess: I've heard the terms index fund in an ETF, is that what it's called? What. What does ETF stand for and what's the difference between those too to a managed fund? Because I feel like there's a lot of jargon in the financial world. And it's quite overwhelming.
Tom: Yeah. Again, this is a category where you don't need to know everything about them, but it does help because there's a lot of information online about the benefits of index funds, for example, and ETFs are very popular, so you're going to hear a lot about them.
Jess: Because I hear ETF, I'm like, I don't even know what that stands for.
Tom: Yeah, so an ETF is an exchange traded fund. Okay. I don't think it benefits really anybody to remember that. But anyway, ETFs are fine. And they're all kinds of managed funds, right? Managed funds is this big umbrella that includes KiwiSaver and index funds and ETFs, and I don't know if it helps or not, but let's just say a KiwiSaver fund can be an ETF.
A KiwiSaver fund can be an index fund. In terms of a regular managed fund and an ETF, the difference between them only is technically behind the scenes. An exchange traded fund is traded on an exchange and its value can go up and down during the day.
Because they're being traded all the time. Those units that we were talking about, those strawberries are being traded all the time. Whereas a typical managed fund might be valued only at the end of the day, and so it would be just once a day. It's not traded on a market. It doesn't really help us to know that much.
But anyway, that's technically the difference between a regular managed fund and an exchange traded fund. What's more important is in any of these funds, is what it's holding, what assets it's holding, how much risk is there, right? Whether it's aggressive. So in all of this, you can think about, okay, there's an aggressive ETF, there's a growth ETF, there's a balanced ETF, there's a conservative ETF.
So, like in any of these funds, you can find your type. That's the most important thing you can change, right? Like you could be in an aggressive and then months down the track decide that you wanna change it. And very often that can be appropriate. So, for example an aggressive fund, is really good to be in when you are investing for about 13 years or longer.
This is a long-term sort of thing. And the reason why that is, is these things go up and down in value. And if, for example, it goes down in value, you want to be in it long enough. To ride it back up again. Because you can see, like over time they go up and down and statistically we give you some ideas how often they might go up and down. On Sorted and things like that. You get an idea of what you're investing in. But for other ones, if you need the money. Next week For your first home, for example, that you're using as a deposit. You don't want to be in an aggressive fund. You want to be in a defensive fund where you make sure that there's no downside.
That money that you're gonna use for your deposit is there when you need it to withdraw. So that's why what's really more important than all the names of these funds is what type of fund are they? What's it holding? What are they doing? How much risk is there coming? That's the most important thing to think about. You need to figure out what type of investor am I? Or what type of fund am I looking for? And again, it comes down to those five.
Jess: And you guys have some brilliant tools to help with that.
Tom: And that goes back to that tool, that investor profiler tool that that I mentioned before. It’s really about helping people understand what kind of, what type of investor they are and therefore what type of managed fund they might be looking for over time.
Jess: you did touch on it a little bit, but just to clarify for my own understanding. Managed funds is better for that long term investment. Rather than say you want too. You want money quickly for a home deposit, say next year, two years.
Tom: No, so in investing in general, it is really about holding onto things and not being forced to sell. But if you look at my example there of a defensive fund for a home, using that for a home deposit next week, it's a very short timeframe. But you are using it, it's a managed fund. That 13 years plus that aggressive fund, that's a managed fund too. So, it's really about dialling up or down your risk by the choice of fund that you're going to your goals. So, for example, if you find out a growth fund is what you're after and what fits you and for different reasons that we can go into if you like. That's the basket of funds that you're looking into. And then you can start to delve into what's different about that growth fund than this growth fund. So, if you think about these fund managers that we're paying these personal shoppers, right. That we're getting, they're working hard for us to. Sometimes they don't work so hard for us on purpose. And an index fund is one way that they don't, and you might want them to be a little bit more hands off. So, there are different styles that these managers have, and one way that they would be more hands off is in an index fund. Because what an index fund is it just tracks and index. So, the most popular one, or one of the most popular in the world is the S and P 500 in the states. There are the 500 biggest companies in the States, and there's all those companies that you've heard of. Maybe some you haven't but all the big players are there.
Tesla, Facebook, meta, Google, all those, what they call the magnificent seven these days. But so, the S and P 500. Is a basket of shares on those 500 largest companies in the states. And there's a couple different ways that they get sliced up. But so here in New Zealand, if you're going to invest in the S and P 500, you might pick an index fund that tracks the index that's based on those 500 companies. And so, the manager doesn't need to do very much at all. All he needs to do is. And I'm sure there's tons of work behind the scenes to set this up, but once it's set up, basically the manager doesn't have to pick, basically he just follows whatever's in that S and P 500. So, it just needs to mirror.
What that index does, and that's what index funds do, and that's what makes them much cheaper, much more efficient and much easier to maintain, to set up now other managers. And that's called passive investing. Because they're not doing that much. That's a passive style of investing to an index. And they're typically very cheap because the manager doesn't have to do that much. They don't have to do a lot of research. They just say, okay, is my fund mirroring the S and P 500? Now there's on the other side of the spectrum are fund managers who do a lot. And they're called active managers, and their style is much more active in what they're doing.
And these tend to be more expensive. But they may be worth paying more for because what these managers are doing is a lot more hands-on research and stock picking and picking of companies for you. And so, they're very much more hands on. And in the KiwiSaver universe or in the managed fund universe, you can find funds anywhere in that spectrum. So sometimes there's a mix of active and passive, a bit of an index, a bit of stock picking going on. And so, you get a lot of different types of funds that are there. So that's really a long way of saying what an index fund is. It is And so instead of going yourself and picking individual shares, basically.
Sometimes you can own all the shares in the world. For example, you can be in a fund that tracks all the shares, all the companies in the world, and just holds a bid in each, because these days we can slice shares. Really finely fractionalised.
Jess: I feel like, there's just so much to manage funds. Let's go back to, if someone's listening to this and they're keen to get into some managed funds, can you step by step explain how someone would do that? So, like with KiwiSaver, we're handheld a little bit. We set up; it's set up for us. It's awesome. And if you are in KiwiSaver, you're already investing, which is great. If wanted to invest in a different kind of manage fund, not KiwiSaver. How would you do it? Do you, I'm guessing these days you'd go online.
Tom: Let's start with why you would do it. KiwiSaver is only good for two things. It's only good for building up funds for your first home and saving for retirement time. The KiwiSaver system is built for that. It uses managed funds to build. So, if you've got goals that are not those two, that's when you might look at other managed funds. So, the question is what goals are you working towards? I mentioned a couple before, maybe it's your next car, maybe it's your kids’ education. And each of those goals has time horizon. For example, if when you have your first child, it might be 18 years away, and so that's then defined. Or if it's your next car or something like that you can be planning for five years away or something like that. It can inform of what kind of managed funds you're going to invest in. I'd invite you on Sorted and to use the investor profile to try to figure out what type of fund you're looking for of those five types that, that I mentioned.
You just answer some questions based on how much time before you need to use the money, how much capacity you have to invest, based on, how secure your job is and how much savings you have and how things are going. And then the third thing is how well you can tolerate the ups and downs in value that comes in.
Because if you go into an aggressive fund, they can have a lot of ups and downs in value. The swings, for example. Let's see if I can give you an example. So like they might go up a hundred percent, they might double in value, but they might also fall 30%. And you want to it can affect your wellbeing too, because you're watching these numbers go up and down.
You can start to lose sleep about it. You can panic. If you're going to go into an aggressive fund, you want to make sure you can stay the course, even when, and everybody thinks they can when markets are doing well. And everyone is risk averse when they're headed downward too. It feels like the world is ending, like in Covid or something like that. It feels like those markets are never going to recover. Why am I doing this? I'm out of here right now. If you set your risk level, for yourself and for the reason why you're investing, you shouldn't have to look at it every day. In fact, like research, so if you look at it every day, the more likely you are to see it fall. And the more likely you are to see it fall, the more likely you are to panic. And actually, not stay the course, and not actually be in when they jump up again and you can't really time it.
This is important to understand is that lots of people try to, but it's been proven over and over again that it's not really, you can't go, oh, here's Covid, I'm going to get out. It's very difficult because you need to make two good decisions, one where to get out and two where to get back in and literally if you miss that upswing and with Covid, it was really in the shape of a v. If you miss that upswing, you're going to miss a lot of the growth that there is. And so, you'll end up really crystallizing your losses. You're really cementing your losses beforehand. It's just on paper. When you watch your balance go up and down, it's just on, on paper. But the moment that you sell those units, those strawberries, that's when you either make money or lose money.
Jess: And I think that's what puts off new investors is when you talk about that and yeah, it is quite nerve wracking. That's what always puts me off as well, is that's quite scary to think that I can put some money. You're putting some money. Money at risk. There is a bit of risk in there. But I think it shouldn't put people off, right? If you're a new investor, you can put a little bit of money in and see how it goes.
Tom: One important thing to touch on is. Yes, it can be nerve wracking, but if you think about the people who are gambling or playing the lotto or something like that, they're doing something much riskier. Because it's not say with shares, you actually have real companies that are supplying goods and services that are building value, and so investing is based on something. Whereas a lot of these other things that we do with money, which I'm not trying to beg on gambling or any of these other things because some of its entertainment, right? If you get an entertainment value out of it, but if it's not based on anything, you're risking your money a lot more.
Jess: I think a lot of people think investing is gambling. But it is different?
Tom: Yeah. And this is the difference between investing and speculation. Really. And usually, I like to explain that is if you think like you're buying something with the hope that somebody will just pay more for it down the line than you're speculating. It's a little bit more like buying a lot a lottery ticket or something like that. In these managed funds, you have fund managers who are looking for value of companies that are valuable and are looking and have the potential to grow their earnings o over time.
So investing is about the future. What are these companies going to do? Are they going to be able to grow, are they going to be able to serve more people? Are they able to generate more revenue coming in? And that's what they're studying. So, there's actually something tangible. And in commercial property, you're looking at, okay, are these properties going to be able to earn rents in the future? Are there going to be more people who want those rents or is there going to be more revenue coming in? Is there something of value? That's going there. So that's really the difference between investing and speculation. So, my point was like, we see people doing a lot more risky things than money, than investing in managed funds.
Jess: And I've heard the term PIR. Do I need to know about that before getting into managed funds, or do you need to know what your PIR is?
Tom: Yeah, so PIR, let's talk tax a little bit. Okay. Because PIR is a tax rate. It's a described investor rate. It's the rate that you get taxed on your investments. So, we haven't talked about the costs that come with managed funds. Okay. That's very good to know. Which maybe you might put that in the con basket. I wouldn't but fees and taxes are something to really keep in mind because they do come into play. They're a thing. And so, your PIR is basically the rate that you're getting taxed on, on those investments. So, when you pay your personal shopper, your fund manager, that comes at a cost. And so, each fund has a different level of fee. That comes with it. And there are different kinds of fees and things like that.
We don't need to unpack them too much. What we do at Sorted is we fold them all together and we give you a fee ratio so you can compare easily of which fund is more expensive than the other. And I mentioned before you've got those passive and active styles. And with active, because the fund manager is doing more work and actually doing more research and things like that, you tend to pay more with index funds.
You tend to pay less because they're a little bit more hands off. If you ever see a fund where the opposite is happening, for example, it's an index fund that's very expensive, something's off there, or if it's an active fund, but it's very cheap, there might be something going on there. So, it's good to have in mind.
But the other cost that comes with it is taxes. And what happens is when you withdraw money from your managed fund, you're not taxed on it. So, for example, after you've invested and built up a hundred dollars, for example, or a thousand dollars or a hundred thousand dollars. You can withdraw a hundred thousand dollars and you're not going to be taxed like an income or something like that. But along the way, as these investments grow over time, there's a certain amount of that growth that is taxed by the government over time. And the rate of that is your prescribed investor rate for specific types of funds, which is a portfolio investment entity. So, you might've heard of PIES?
So if you've got PIRS and PIES. A PIE is a is a kind of managed fund. So, a portfolio invested entity that has certain advantages of taxes and the levels of tax you'll pay in a PIE. And most Kiwis funds are PIES and a lot of managed funds are PIES. Not all of them, but a lot of them are, which is why it's important to know your PIR what it is. What rate you're being taxed at. But it's a lower rate than what you would, for example, if you were to invest in another way and get taxed using residents withholding tax and other ways. So, you should know your PIR and there's easy way to find, I find out, depending on to find it. Yeah, we've got a little widget on it depends on your income of the year. And any fund manager can help you.
Jess: Okay so it's not I imagine it wouldn't be something that, people just know.
Tom: That three level, three levels of tax, so the top level is that 28%, 17.5, and 10.5. Those are basically the three levels, depending on your income that you get taxed at as your investments are taxed. It's important to know. Okay. And so that's the other advantage of a managed fund is it simplifies tax because the manager takes care of all of that for you, you don't have to file a separate return, you don't have to, fill out a different form within Inland Revenue or anything like that.
In terms of those fees, there's a little bit of a myth. Like we've been talking a lot about how different managed funds are, and it's, and that difference includes in fees. There's a lot, it's a bit of a myth, and I would like to bust that myth right here that they all are more, much of a muchness and they all cost about the same. Not even close. As you do your series, you're gonna talk to more finance people. And finance people are interesting because they talk in basis points. They don't talk in percentages. They talk in hundreds of a percentage. So for example, if something goes up 0.25 they call it 25 basis points. Something that means nothing. But they do that. I found out it doesn't come naturally to me either in basis points. So 1% would be a hundred basis points.
Jess: Why do they call it a basis point?
Tom: It's a hundredth of a percentage point. And they might say bips, for example. Not my strong point. And the reason why they do that is because those tiny percentages matter a lot. Especially on big sums of money over invested, over long periods of time. So, one of the tools we have on Sorted is our KiwiSaver fund finder and what Fund Finder does, for example, and it's doing this basically for managed funds, right? Because all KiwiSaver funds are managed funds is, it's estimating what you'll pay in fees from now until you're 65. And we are talking about 10 of thousands of dollars of difference. So for example, I did one the other day for an 18-year-old, right? Who's just starting out, just as a hypothetical, and the lowest costing one, this hypothetical investor was going to pay $5,000 over their entire.
Until they're 65 in this and $5,000 is a lot of money. But it's cheap over that amount of time. The highest amount, the highest KiwiSaver fund was $60,000 cheap for this one. So we are talking about a lot when these tiny little percentages points back to my why do they count basis points is because they make a huge difference.
So you gotta pay attention to. How much in fees and on we make it easy to compare in fees, but also to do calculations like this. Because if I had to do the calculation myself of how much am I gonna pay over decades, I'm not gonna do it. But we make it real easy. So just a couple things about you and a couple clicks, and you can see it right away. The most expensive fund, the cheapest fund, and the most expensive one. In two clicks.
Jess: And if someone's listening to this and they still, they're interested, but they still don't really know how to get started and stuff, is this where you can go to an advisor as well to help with, setting up a managed fund and all that type of thing?
Tom: Yeah. So, we're very much pro advice on Sorted. We would say come to Sorted first because when you go talk to an advisor, you can have more informed, richer conversation within an advisor when you've gotten through some of questions before you go. So, we've got a lot of support that'll help you interact with an advisor. But professional advice, good advice is gold. It's a really great thing and what you want is, a financial advisor who really has your best interest at heart, and the good ones will, and. Those ones that you pay them for their time, then they're not necessarily there trying to link you to a given product, to a given fund. So definitely advice is a great way to go, but you don't need to in terms of, you can go right to a fund manager and they're all the. The key names that we know. Or you can go through a platform like say if, again, if you're on Sharesies, Hatch or Stake, you're not just picking individual companies. You can pick funds on there. So you can do it do it yourself online. It's just like setting up a bank account.
So all of those companies that you may have heard of that offer KiwiSaver, they offer managed funds. And so you wanna come to an independent source like Sorted, so you can sift through all the different brands and what they're offering. You can sift through them on important things like their risk level, what type of funds do they offer, their fees, whether they're reasonable or not. So you can compare and understand what you're paying before you go directly to them. And then you can also see where your money will be flowing. What companies will you be flowing into? What does each of those funds hold? In terms of assets that we were talking about, how much is in bonds, how much is in shares, and then it's like going down a rabbit hole.
There's more information than you'll ever want to know, but it's all, we've got it on our Smart Investor platform on Sorted, which really has all the managed funds on offer here in New Zealand. So it makes, it is like one stop shopping right at the beginning, and that's before you go to a fund manager, but you definitely can do it yourself.
Jess: That's awesome. 'cause I think where I get overwhelmed is there's so many different ways to invest. So I'm just like, yeah, how do you choose? But you guys have all the information, which is awesome. You can go into all the different types of investments and then work out what, what suits you and use the calculators that you guys have got, they're really good.
Tom: That's what they're for, so we really tried to break it down for people to really get the key things in place. Before you put your money at risk. Before you buy really.
Jess: Because the budget tool's really good. I was using it the other day. I had done a budget before, but I hadn't looked at it in a while, so I like, I should redo it and yeah look at my money. Where is it going?
Tom: That, that can come in handy. Also, when you're trying to figure out how much you can you invest.
Jess: That's why I was doing it, because I was like, once I feel like I know what I need to know to start investing, I'm like, so how much am I actually gonna invest.
Tom: Yeah, exactly that and like it, it helps to have a, when you have a steady income in particular, but even if your income is more ups and downs, depending on the seasons, it's great to have a plan for what that income is gonna do so that each time you're paid, you can funnel money towards where you want it to go, and make sure you get towards your goal. So that's where that budget planner really helps you do that. So you can figure out well I can do $50 every two weeks, for example.
Jess: You don't have to do thousands of dollars. Yeah. You can literally do 50.
Tom: It adds up over time. If you want to see how that can grow over time. Again, we've got the calculators to show, and then you can see whether you're on track to meet your goal or not. Again, if you want a new car in five years from now or something like that, you've got one that works, but you're thinking about that and the next one you want to be investing for it.
You can figure out whether you're investing enough or not enough or depending on what type of car you're wanting.
Jess: Some people might be similar to me, where I used to find it really stressful even just looking at my account, like the idea of money going out gives me mad anxiety. But doing the budgeting tool although it was challenging, I put it off for weeks and weeks, I was like, no, I'm gonna do it. It was helpful and it feels like it relieves a little bit of that stress of actually looking at where your money's going. And then even if you. Are struggling a little bit financially sometimes just seeing it does help to be like, cool, I can cut down here and here. And then I can put that towards investing. It actually is a great tool and if you're like me and you put it off, do it. So I would definitely recommend doing it.
Tom: Oh, great. One of, one of the really cool things about being part of the team at Sorted is really to help people's anxiety levels go down. And a lot of people might look at a budget like it's constraining but actually it just helps you stay in control, steer your money where you want it to go. Because everybody else has got a different idea of where they want your money to go, right? And sometimes you're paying for things you don't even know you're paying for.
Jess: There's so many subscriptions to all sorts, so it's a good way to actually break it right down. And it's really user friendly. Like I was just clicking through and you just put in all the different columns. Yeah, it was really good. Really helpful.
Tom: Oh, I'm glad. So that can help you get started investing, the first thing is figure out how much money you can really set aside for your investing, because again, you're going shopping, right? You're taking that money a little bit at a time and buying stuff or getting a fund management to buy stuff for you. Managed funds really help us take advantage of compounding interest. And I don't know if you've talked about that on this podcast, but that is..
Jess: I've heard a little bit in our KiwiSaver series a little bit about compound interest.
Yeah. But I would still say I don't know a lot about it.
Tom: So that is really the engine that helps you grow your money, and it is like snowballing money over time. And that's why little and long really gets you some really good results. But basically, it's when. Your returns, the things you get back from investing, stay invested and start earning returns of their own. Lots of times we talk about interest. So, if you, for example, get paid in interest and then you left that money still invested or in your bank account, that money would start earning interest. And over the years, basically it's a little bit like I'm mixing metaphors a little bit here, but it's a little about, if you think of how a jet plane takes off, right?
It's the jets behind that. So basically it stays flat for a while, stays flat for a while, and then all of a sudden it starts to take off like this. That's what compound interest is about. And when you invest in a managed fund, you are compounding those returns because usually you're leaving that money invested that's in there. And so when you get some money back to you, you don't necessarily pull it out. You pull it out when you want to hit your goal and so it stays in there and that money starts growing and growing and eventually if you keep investing, like say KiwiSaver, for example, at some stage, you're gonna see that your KiwiSaver fund earns more than you do on your job. Not every month, but some months. And that's because of compounding interest, and that's because you've been in it so long that it's now going like this. And I think it would be great if so many more people could have that experience of investing over the long term and just harness that compounding to really grow their money.
Jess: I must say like the main takeaway I've taken from episode one with Sim, and then this chat now with you, is you don't have to be a billionaire to start investing like, little amounts can go such a long way. I never would've thought about that. I just assumed it wasn't for me. I'm not mega rich. Nah, just ignore it now.
Tom: For someone like you, because time is so much on your side, you can get incredible results in KiwiSaver. And if you wanna see how in managed funds in general, if you wanna see what those could be like, come on Sorted, run some numbers, and you'll be like, wow. Over long periods of time. Your results can be astounding. You can see that your managed fund can earn more than you can in a job, which is also, who doesn't want that? And it won't be every month. cause that'll be only some. But yeah. I've been pleasantly surprised when I've seen that happen. On some good months. I'd been like, wow, that thing is earning more than I earn.
Jess: That's so cool. And so if someone's been listening to the whole podcast, they got to this point, what's one key takeaway you would give them? Whether it's a new investor or someone that just wants to find out more? What's one key little takeaway about managed funds?
Tom: Yeah it's really that last one, like managed funds is a very powerful way to grow your money over long periods of time in particular. And with investing, what you're doing is you're putting your money at risk in order to be paid a return. Managed funds offers you a way to do that's safe and that lets you really reap the benefits of that compounding over time.
Jess: Awesome. And I know we've talked throughout the whole episode a little all the different tools that you guys have, but where would you steer people if they've listened to this podcast that you've sold them on managed funds, but they want to find out more? Where do they go?
Tom: If we're talking about managed funds in particular a good place. We've got a guide on investment funds in general, and so if you wanna read more about a lot of things that we've been talking about here, that's a good place in terms of looking through the managed funds that are on offer here in New Zealand. It's our smart investor platform and we divvy it up between KiwiSaver and then managed funds that are non- KiwiSaver. So if you wanna sort through KiwiSaver funds and look at the differences there you can do that. But managed funds are off to the side and you can really isolate those.
And then the next step is really to understand how much risk you want to put your money at. And what's appropriate for you. And then you can look at just aggressive funds or just growth funds or just balanced managed funds. And so we've made it pretty easy to compare within there. You get the risk level, right, then you start to look at whether the, how the fees compare and whether they're reasonable or not, and basically where, what kind of assets. Are in that fund that you want to invest in? What companies does it hold? What kind of companies does it hold? Are they here, are they overseas? Are is it more of an index fund that tracks an index and maybe you can save money doing that? Or is it more a hands-on fund manager who's doing a lot of research for you and maybe you can get better results that way? We can't tell the future on how we'll do with our investing, but overall managed funds is
Or can give you the framework in order to grow your money. Over time, we are not sure how the markets will do, but people have been investing for a long time and benefiting from them. And as long as companies and governments keep working and keep adding value, there's gonna be that growth in the future to take advantage of.
Jess: And it seems like such a great tool for new investors. Because there's so many different types of investments. It is scary. But yeah. Managed funds seems like quite a safe first time way to invest.
Tom: There's a reason why when KiwiSaver was set up, they decided to use managed funds as the vehicle to help people save for either their first time in retirement. It Is because it's a great way to get started.
Jess: Thank you so much for joining me today. If you wanna find out more about managed funds, make sure you head on over to sorted.org.nz and we'll see you next time.
The content of this podcast is of a general nature and is not financial advice. The thoughts and opinions of guest speakers are not those of the FMA.
The FMA recommends that our audience seek advice and respect to investing from a regulated financial advisor. The FMA does not accept any responsibility for loss that any person may suffer from following it.
