Buying a managed fund is a lot like going in on a group gift or joining a co-op--with people youll never meet. Managed funds allow a group of investors to combine their cash and invest it. By pooling their money together, managed fund investors can sample a broader range of stocks or bonds than they could if they were trying to buy the stocks and bonds on their own.
The fund manager combines your money with that of other investors. Taken altogether, those investments are called the funds assets. The fund manager invests the funds assets, typically by buying stocks, bonds, or a combination of the two. (Some funds buy more complicated security types.) These stocks or bonds are often referred to as a funds holdings and all of a funds holdings together are its portfolio.
A funds type depends on the kinds of securities it holds. For example, a small-company stock fund invests in the stocks of small companies. What you get as an investor or shareholder is a portion of that portfolio. Regardless of how much or how little you invest, your shares are the portfolio in miniature.
Managed funds offer some notable benefits to investors.
1. They dont demand large up-front investments.
If you had just $1,000 to invest, it would be difficult for you to assemble a varied basket of stocks or bonds on your own. If you bought a managed fund, though, you would be able to sample many more types of stocks or bonds with that same $1,000. You can make an initial investment in several funds with just $1,000 in hand; $2,500 will get you into many more funds.
2. Theyre easy to buy and sell.
Whether youre investing on your own or hiring an adviser to do it for you, funds are easy to buy. Once a fund company has your money, it often takes just a phone call or mouse click to buy shares in a fund.
By the same token, its also easy to sell a fund. Unlike many other security types, such as individual stocks, you dont need to find a buyer when its time to unload your shares. Instead, the vast majority of managed funds offer daily redemptions, meaning that the fund company will give you cash whenever youre ready to sell.
3. Theyre regulated.
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Managed fund managers cant take your money and head for some remote island somewhere. Security exists through regulation set by the government.
The fact that managed funds are regulated shouldnt give investors a false sense of security, however. Managed funds are not insured or guaranteed. You can lose money in a managed fund, because a funds value is based on the value of all of its portfolio holdings. If the holdings lose value, so will the fund. The odds that you will lose all of your money in a managed fund are very slim, though--all of the stocks or bonds in the portfolio would have to go belly-up for that to happen. And history suggests that such a mass implosion is unlikely in the vast majority of fund types.
4. Theyre professionally managed.
If you plan to buy individual stocks and bonds, you need to know how to read a companys cash-flow statement or assess the likelihood that a given company will fail to meet its debt obligations. Such in-depth financial knowledge is not required to invest in a managed fund, however. While managed fund investors should have a basic understanding of how the stock and bond markets work, you pay your fund managers to select individual securities for you.
Still, managed funds are not fairy-tale investments. Some funds are expensive and others perform poorly. But overall, managed funds are good investments for those who dont have the money, time, or interest necessary to compile a collection of securities on their own.
More in this series:
- Why invest?
- What is your investing edge?
- What is a stock?
- What is a Bond?
- When to start investing?
Mark Lamonica is a product manager, Individual Investor, Australia.
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is a product manager, individual investor, Australia.
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