Though exchange-traded funds (ETFs) dominate today’s investment chatter, managed funds haven’t disappeared. They’re still relevant. For many Australian investors, managed funds continue to offer unique advantages that ETFs might not.

Whether you’re new to investing or building a long-term investing strategy , understanding managed funds can help you make informed decisions. In this article, we’ll break down what they are, how they work, and their key differences from ETFs.

We’ll also explore the risks and benefits of managed funds and discuss the types of investors who might find them useful in today’s market.

Investing can sometimes feel overwhelming, but having the right knowledge makes all the difference. Let’s get started!

What is a managed fund?

A managed fund , also known as a mutual fund in the US, is an investment vehicle. In a managed fund, your money is pooled with other investors' money and managed by professionals. These professionals – fund managers – use their skillset to invest in a range of assets according to the fund's strategy. The goal is to generate returns for the investors.

There are several types of managed funds. Each focuses on different investment strategies and asset classes. Some common types include:

• Equity funds invest in company shares. They may focus on specific sectors (like technology or healthcare) or have a broader market approach.
• F ixed income funds invest in bonds or other debt instruments, providing a more stable income stream. They're typically less volatile than equity funds.
• Balanced funds invest in a mix of asset types, such as equities, bonds, and sometimes property or commodities. They aim for a balance of growth and income.
• Sector funds focus on specific industries or sectors, like agriculture. They give investors targeted exposure to certain areas of the market.
• International funds invest in international or global markets, offering exposure to foreign stocks, bonds, and other assets outside of Australia.
• Property funds are focused on investing in real estate. They provide exposure to property markets, such as commercial or residential property.
• Ethical or ESG funds invest in companies or projects that align with certain social, environmental, or governance standards.
• Hedge funds typically aim to deliver high returns by using more complex investment strategies, such as leveraging , short selling, and derivatives. They often mean taking higher risk and may be less accessible to average retail investors.

Each type of managed fund caters to different investment objectives, risk appetites, and preferences, allowing investors to choose the fund that aligns with their strategy.

A brief history of managed funds

In the 1920s, the Massachusetts Investors Trust revolutionised investing by enabling ordinary people to pool capital and access professional asset management. This marked a significant shift in retail investing.

Australia embraced managed funds during the 1980s and 1990s, with the 1992 superannuation reforms sparking their growth. These reforms transformed the nation's financial landscape.

Managed funds quickly grew beyond traditional stocks and bonds, including international shares, real estate, and other investments. They offered a new level of diversification. And unlike direct investing , managed funds let professionals handle the research, decisions, and day-to-day management of a portfolio.

ETFs emerged in the early 2000s, introducing healthy competition. While ETFs were lower-cost alternatives with greater transparency, managed funds maintained their edge through sophisticated active management.

Today, managed funds , sometimes called mutual funds, are global presences that continue to reshape how we think about investing. While ETFs now dominate headlines, managed funds remain an option for investors seeking expertise and tailored investment strategies.

How are managed funds and ETFs different?

At first glance, managed funds and ETFs may seem similar. Both let you invest in a range of assets with one purchase. Here’s how they compare:

Trading process

• Managed funds : Bought and sold directly with the fund provider. Transactions happen at the fund's daily price.
• ETFs : Trade on the stock exchange (e.g. Australian Securities Exchange ) like shares. Prices fluctuate throughout the day based on supply and demand.

Management style

• Managed funds : Typically actively managed. A professional fund manager aims to outperform the market by choosing specific investments.
• ETFs : Often passively managed . Most aim to track the performance of an index, such as the ASX 200 .

Costs

• Managed funds : Usually have higher fees to cover the cost of active management and research.
• ETFs : Tend to have lower ongoing costs, making them attractive for cost-conscious investors.

Which one suits you?

Both options have their place, but your choice depends on your goals, preferences, and investing style. Managed funds offer professional expertise, while ETFs are often more cost-effective and preferred for passive investing.

Mutual funds vs managed funds: subtle distinctions

The terms mutual funds and managed funds are often used interchangeably, but they’re not exactly the same. Here’s what sets them apart:

Feature	Mutual funds	Managed funds
Region of use	Commonly used in the US and global markets	Primarily used in Australia and New Zealand
Structure	Pooled investment vehicles open to global investors	Similar structure but is tailored to local regulations, overseen by ASIC
Management style	Mutual funds can be actively or passively managed	As mentioned, typically actively managed
Availability	Widely available in international markets	Designed to meet the needs of Australian investors
Terminology	Mutual fund refers to a broader category, including US-specific options	Managed fund is the local Australian term

The main difference between mutual funds and managed funds lies in terminology and market focus. Australian investors will mostly encounter managed funds, aligning with ASIC regulations and needs.

Understanding these distinctions helps when comparing global options or researching investments tailored for Australian markets.

Risks and benefits of managed funds

As with any investment, managed funds come with both benefits and risks. Considering these helps you decide if they’re a good fit.

Potential benefits of managed funds

• Professional management : Experts make investment decisions on your behalf, using research and experience to guide the portfolio.
• Diversification : Managed funds invest across a wide range of assets, helping to spread risk .
• Access to niche markets : Some managed funds specialise in areas like emerging markets or specific industries, which can be harder to invest in directly.
• Long-term focus : Many funds are designed for investors aiming to grow wealth steadily over time.

Risks of managed funds

• Higher fees : As mentioned, active management often comes with higher costs, which can impact returns over time. This is a key aspect of managed funds to be wary of. As American investor and businessman John Bogle said : "You want a managed fund that… is like a sailboat fighting not a typhoon of costs, but only a breeze."
• Performance variability : There’s no guarantee that the professional fund manager will outperform the market.
• Liquidity limitations : Unlike ETFs, managed funds don’t trade on the stock exchange and may not offer the same flexibility to buy or sell.
• Market risks : Returns can fluctuate depending on market conditions and the assets held in the fund.

The role of managed funds for modern investors

As noted, many investors turn to ETFs because of their low costs and ease of access. But managed funds still play a crucial role, particularly for those who value expert oversight and tailored strategies.

Who might use managed funds?

• Long-term investors : If you’re investing for retirement or other long-term goals, managed funds offer a hands-off approach. A fund manager oversees the investments, letting you focus on your future.
• Time-poor investors : Managed funds are ideal for those who don’t have the time or expertise to manage a portfolio themselves. You can rely on professionals to make the key decisions.
• Investors seeking diversification : Managed funds allow you to invest in various assets, including those outside the Australian market. For example, a fund focused on global equities or emerging markets offers exposure to regions you might not access easily.
• Investors with a specific goal : Some managed funds focus on ethical or sector-based investing. For example, if you’re passionate about environmental sustainability or tech innovation, there are funds designed to reflect those interests.

How would investors use them?

Investors may use managed funds in various ways, including investing in superannuation funds (professionally managed for long-term growth), creating a balanced portfolio and targeted growth. We’ll explore these examples and more in the next section.

As we’ve seen, managed funds can be a great option for certain investors. They offer professional management, diversification, and access to specialised markets, making them a valuable choice for long-term, goal-focused investors.

Managed funds in action

Managed funds can work well for different investment goals. Let’s look at some examples to show how they fit into a portfolio:

Example 1: A diversified portfolio

Let’s say you want to invest in a mix of Australian shares, international equities, and bonds. A diversified managed fund can do this all in a single investment. This can help spread risk while targeting growth.

Example 2: Ethical investing

You’re passionate about the environment and want your investments to align with your values. There are managed funds focused on sustainability, renewable energy, or ethical businesses. This way, your money supports the causes you care about.

Example 3: Specific sector exposure

If you believe that, for instance, the technology sector will grow, a managed fund focused on tech companies might be a fit. It would allow you to invest in this sector without picking individual stocks.

Example 4: Long-term retirement savings

Managed funds are often a part of superannuation funds, offering steady growth for retirement. A long-term investor may appreciate the hands-off approach of a professionally managed fund.

Why these examples matter

These examples show how managed funds can be a useful part of different investment strategies. They can offer flexibility and access to markets or sectors that may potentially be harder to reach otherwise.

Wrapping it up: Are managed funds right for you?

Managed funds may not always be the flashiest option, but they still offer value for many investors. Whether you’re looking for professional management, diversification, or access to niche markets, they’ve got you covered.

As we’ve explored, managed funds adopt a different approach to ETFs, with unique benefits and risks. Understanding these can help you decide what’s right for you.

The key is figuring out how managed funds fit into your financial objectives. With the right investing strategy, they can be a valuable part of your portfolio.

Keep learning and keep investing to reach your personal investing goals.