At the end of 2005 Australia had a grand total of 360 fund managers and around 30,000 different managed funds*. No wonder choosing a fund can be so confusing. But with a bit of help it can be simpler than it first appears.
Funds generally invest in one or more of the asset classes and suit different risk profiles. When considering a particular fund the most important thing to look at is the asset allocation. The name alone doesn't always properly explain what a fund does and performance can vary dramatically for two different funds with the same name. Here are some of the more well known fund categories.
Multi-manager fund
These are sometimes referred to as a ‘fund of funds’. Rather than investing directly in shares, cash or fixed interest, the fund invests in a selection of other managed funds. These funds are usually managed by several different fund managers. Depending on the investment objective, the funds may focus on one asset class or several.
Income funds
These funds focus on generating an income stream with low risk of capital loss. They are sometimes known as ‘defensive’ funds and tend to be heavily weighted in cash and fixed interest type investments.
Growth funds
These funds focus on long term capital growth rather than income and are generally suited to people who don't need to access their money for 5+ years. They tend to be heavily weighted in property securities, Australian shares, international shares or all three.
Single sector funds
Single sector funds invest in just one asset class - either cash, fixed interest, property, Australian shares or international shares. Some single sector funds also specialise within an asset class, for example small companies funds, international resources funds and geared share funds.
Diversified funds (also known as multi-sector funds)
As the name suggests, these funds tend to diversify across a number of asset classes. Different diversified funds will have different levels of risk, so it's important to look at the asset allocation before deciding to invest.
Index funds (also known as passive funds)
These funds aim to achieve performance returns broadly in line with a selected market index (e.g. the ASX Top 100). The fund manager makes no judgements about companies or future market movements, they only seek to accurately reflect the index they are tracking.
Active funds
These funds are actively managed and aim to outperform a particular index (for example outperform the returns of the S&P ASX Top 100). To do this the managers will actively research the market and buy and sell assets based on the fund's objective.
Platforms (including master trusts and wrap accounts)
This isn't a managed fund, but an administrative structure which allows you to invest in a broad range of investments such as managed funds, master trusts, direct shares and insurance products. The service centralises all your transactions and reporting, making it simple and easy to keep track of all your investments.
What to consider next
Speak to your financial adviser or choose an option here:
The information contained in this document is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468 has of the relevant Australian laws as at 1 July 2009. This document is not advice and is intended to provide general information only. It does not take into account your individual needs, objectives or personal circumstances. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. Product Disclosure Statements (PDS) for products offered by Colonial First State are available from colonialfirststate.com.au or by contacting us on 13 13 36. You should read the relevant PDS and consider whether the product is right for you. Past performance and awards are no indication of future performance.