7 Biggest Mistakes That Investors Make When Investing in Managed Funds
Online, June 12, 2014 (Newswire.com) - Investors are quick to praise when investments are doing well, but are notorious for not taking accountability for their investment decisions when things take a dive. It is understandable to a certain degree - people usually don't sink their savings into an investment to lose money, unless they're effectively (or ineffectively!) trying to minimise their tax.
This is why investing in a managed fund is extremely appealing. Of the types of investment vehicles in the market, investing in a managed fund offers ease, convenience and there is comfort that investors have knowing that their money will be expertly handled by a fund manager (or investment manager) who make the investment decisions. As this is a type of managed investment scheme the fund manager will pool your money with that of other individual investors and buy and sell shares and assets on your 'collective' behalf. Instead of owning a 'share' you own 'units' in a managed fund and the value of your investment is determined by the total value of your unit holding.
What makes managed funds an attractive investment is that they offer greater diversification than many investors could otherwise achieve, where investing in a small basket of shares or purchasing a property doesn't. Fund managers will usually spread the money over a broader range of investments to reduce exposure to risk. In addition, investing in a managed fund also requires relatively small amounts of money and it also allows you to make regular contributions.
Managed funds can be a great addition to your investment portfolio, but you've got to choose the right one. Surprisingly, even the savviest of managed fund investors can get it wrong. Here is a list of the 7 mistakes that investors commonly make when investing in a managed fund, so you know what not to do!
Managed Fund Investor Mistake # 1: Failing to plan
As with most things in life, having a plan will set the direction for your efforts ensuring that you are on your way to achieving goals. As with investing in managed funds, you should always have a strategy that outlines short term and longer term financial objectives and how to achieve these. Take into account your goals, preferences, timeframes and even the level of risk you are comfortable with, often referred to as 'risk tolerance'. If you are an investor who is risk averse you will show a natural tendency for investments that are less volatile and carry less risk, even if this means forgoing higher rates of return. Or you may be the type of investor that is risk tolerant, so you are more open to risk and volatility in the pursuit of a higher rate of return. As such, you may choose managed funds that are more 'aggressive' offering higher rates of returns but also carry a higher level of risk. It is imperative as an investor that you take the time to plan, ensuring that you clearly outline your financial goals, invest within your comfort level and have an exit strategy if things aren't going to plan or the worst case scenario becomes your reality.
Managed Fund Investor Mistake # 2: Not doing the homework
Before you invest in a managed fund, it's important to do your finance homework. Don't just invest because you took a 'hot' tip from Mr Jones next door or judged the success of a managed fund by its fancy corporate advertising. These are sure fire ways to lose money. Instead, conduct thorough research and ensure that you have chosen the right type of fund for you. Educate yourself on the different types of funds and decide whether you want to invest in an actively managed fund or prefer an index fund. Should you choose asset-specific funds such as share funds, property funds or bond funds and if so, should you invest in single-asset or multi-asset funds? There are also funds that only invest in local assets such as the Australian share market or do you prefer to invest in a fund with an international outlook? In addition, you should also consider other important factors such as fund ratings, past performance data as well as the expertise of the financial organisation that you are trusting with your hard earned savings. By taking the time to examine these details, you may just avoid many a sleepless night.
Managed Fund Investor Mistake # 3: Setting and forgetting
Just because managed funds are a more convenient form of investment than other investment types doesn't mean that you should just 'set and forget'. This methodology is not an ideal long term strategy and the repercussions of being complacent can cost you dearly. An investor should keep a track of their investment at all times. It is easy to take the default position and rely on an investment manager's financial expertise, but you shouldn't defer your control to someone else, even though it is a managed fund. You can still play an active role in your own investment by reviewing all of the fund reports, auditor's reports and ensuring that if the numbers don't add up, that you have an exit strategy to avoid further financial risk.
Managed Fund Investor Mistake # 4: Overlooking fund management fees and expenses
A managed fund charges fees in order to operate and make a profit. Each fund differs in the fees it charges however each will charge a combination of the following types of fees: entry fees, exit fees, ongoing fees, annual management fees and even performance fees.
Many investors overlook these fees instead focussing in on returns and overall performance and not realising that these fees can actually erode returns. One metric in particular that many investors should take into account is the management expense ratio (MER) which is expressed as the percentage of the total fees and expenses to the net value of the fund's assets. Therefore, the lower the MER the less that is being withdrawn out of the managed fund's profits to pay the fund manager.
In addition, investors should also avoid investment managers who only report gross returns (before fees and charges) in their marketing material as this can incorrectly inflate returns as well as give the impression that they are trying to hide something. "The truer test of performance are returns after fees and not gross which is how a large section of the industry reports," says Nicolas Bryon, Fund Manager at APSEC Funds Management further elaborating that "there will be times when gross returns support the view that a particular manager is outperforming their benchmark but after fees is actually not." Net returns should always be the benchmark for comparison purposes. It is also important to note that in some cases, higher fees can be associated with better performance. Of course, using fees as a factor for selection in isolation may not yield optimal outcomes as you will learn in the next point.
Managed Fund Investor Mistake # 5: Zeroing in on just one metric
Often investors can get caught up with relying on just one piece of information to make a decision. This is true for investors who just make investment decisions purely based on historical performance statistics or on fund ratings by ratings agencies. Just because a fund performed well one year does not mean that it will perform the same the next year. Likewise, investors shouldn't choose funds solely on fund ratings. Focussing in on just one metric without a bird's eye view of all factors is detrimental; it's like buying a house because you like the look of it, without doing a complete house inspection that may uncover things like roof leakages, poor building structure, and termite infestation and so on.
When it comes to investing in managed funds, it's best to avoid tunnel vision. So be sure to consider elements such as the expertise of the investment manager, the experience of the financial analysts, changes within the management team, how they invest, where they invest and the fees they charge.
Managed Fund Investor Mistake # 6: Putting all your eggs in one basket
It is true that managed funds offer a higher degree of diversification than other investment types, but you can still get caught in the trap of putting all your eggs in one basket if you are choosing to invest in just one type of fund or if the managed fund is your only investment. The reason financial experts advocate diversification is to ensure that as an investor, you are spreading the risk across your investment vehicles, ensuring that you are safeguarded from the shocks of short term instability and volatility of the market. If you have selected a single-asset fund, you can be certain that this is less diversified than a multi-asset fund. Furthermore, if you have only invested in one type of managed fund or the managed fund represents the entire value of your investment portfolio, you may need to rethink your investment strategy.
Managed Fund Investor Mistake # 7: Not seeking independent advice
Regardless of how little or how large your managed fund investment, it is important to get independent financial advice. If you read the fine print of many fund reports and even the Product Disclosure Statement, they all point to the fact that all fund management practices, reports and information do not take into account your individual needs, your personal objectives and your financial situation. Getting independent and unbiased financial advice is not only sound advice, but is a crucial decision as it can mean the difference between losing your life savings and achieving your financial goals.
Following the advice set out in this article will not only guide you to selecting the right fund but can help you avoid the many pitfalls that managed fund investors face. Of course there are no guarantees when it comes to investments. All you can do is study, learn and arm yourself with information, knowledge and unbiased financial advice that will increase your odds and turn your investment into a winner.
To find out more about Managed Funds and how they can fit with your investment strategies please visit http://www.apsecfm.com.au/
About:
APSEC Funds Management
Website: http://www.apsecfm.com.au/
Email: info@apsec.com.au
Address:
Level 4, 151 Castlereagh Street
Sydney, NSW, 2000
Australia
Ph: +612 8356 9356