By Warren Ingram, CFP®

Managed funds, also known as mutual funds, have emerged as a popular and efficient investment vehicle for individuals looking to grow their wealth while minimising risks. This blog sheds light on the myriad benefits that make managed funds attractive for savvy investors.

Diversification for Risk Management

One of the primary advantages of managed funds lies in their ability to offer diversification. This strategy spreads investments across various asset types, industries, currencies and geographic regions. Diversification is a potent risk mitigation tool, as it helps shield investors from the impact of poor performance by any single investment. By pooling resources from many investors, managed funds provide instant access to a diversified portfolio that would be challenging for an individual investor to replicate.

Protection of assets

Investors in a managed fund can take comfort that they own their assets, not the company managing the fund. If the fund management firm is liquidated, the creditors of the firm have no rights to the money invested in its managed funds. These funds are structured so that the assets belong solely to investors in the fund; the fund manager only has the right to charge specific fees and to manage the money according to an explicit mandate that outlines what the fund manager may buy and in what proportion. For example, a mandate might dictate the fund is only allowed a maximum of 65% invested in shares and must have a minimum of 5% in cash. In addition, any withdrawals from the fund must be paid back to investors and may not be paid to third parties or the management company. You can lose money if the fund does not perform well, so performance is not guaranteed; therefore, it is essential to understand the risk of your fund before starting your investment.

Liquidity and Accessibility

One of the notable advantages of managed funds is their high level of liquidity. Investors can buy or sell their investment on any business day at the current net asset value (NAV). This flexibility ensures that you can access your money quickly. This liquidity might be absent in other investments, such as real estate or individual shares. The ability to convert assets into cash quickly can be crucial, especially when investors need to fund an unforeseen expense or capitalise on a new opportunity.

Cost Efficiency

Managed funds often offer a cost-effective way for investors to access a diversified portfolio. The operational costs of operating a fund are spread across its investor base, reducing the individual investor’s expenses. Compared to the costs associated with buying and selling individual shares, managed funds provide a more affordable avenue for those seeking exposure to a broad range of assets. Additionally, the economies of scale achieved by large funds can result in lower transaction costs, further enhancing cost efficiency.

Automatic Reinvestment and Dollar-Cost Averaging

Managed funds offer investors the convenience of automatically reinvesting dividends and capital gains. Instead of receiving these distributions as cash, investors can have them automatically reinvested in the fund. This feature enables the compounding of returns over time, potentially accelerating the growth of the investment.

Furthermore, managed funds facilitate dollar-cost averaging, a strategy where investors contribute a fixed amount of money regularly. This disciplined approach to investing allows you to buy more shares when prices are low and fewer shares when prices are high, mitigating the impact of market volatility. Dollar-cost averaging promotes a long-term investment mindset and reduces the risk of emotionally driven investment decisions, as these tend to be detrimental to your financial health!

Regulatory Oversight and Transparency

Managed funds operate under stringent regulatory frameworks that are designed to protect investors. Regulatory bodies, such as the Financial Conduct Authority (FCA) or the Securities and Exchange Commission (SEC), impose rules and regulations on fund managers to ensure transparency and fair dealing. Investors receive regular reports on the fund’s performance, portfolio holdings, and fees, providing transparency and accountability. It is pretty easy to track your fund’s performance online, as multiple sites offer free updates on fund prices and performance.

Conclusion

With their diversified approach, professional management, and cost efficiency, managed funds have proven to be a valuable investment option for individuals seeking to build and preserve wealth. As with any investment, you must do thorough research, assess the fund’s risk, and ensure it aligns with your investment objectives. By leveraging the benefits of managed funds, you can navigate the complexities of the financial markets more confidently and work towards achieving financial freedom.