Don’t believe the hype. Do your homework before investing.
“Cash returns like clockwork.” “What are you waiting for?” “How do you stay afloat when interest rates are sinking?”
If you’re looking for a better return on your money, ads for managed funds – promising returns as high as seven percent – can make them seem an easy option.
But don’t start planning how you’ll spend those juicy returns just yet. Before you call the fund manager, there are a few key things you should check.
A managed fund, such as KiwiSaver, pools money from investors and can be put into different asset types such as shares, property, bonds or cash. Funds are run by managers who make their money charging fees, which can vary widely.
There are five main types of funds: defensive, conservative, balanced, growth and aggressive. All investments have risk but growth and aggressive funds tend to have the highest levels. In theory, the riskier the fund, the greater the reward over the long term, although that doesn’t always work out to be the case.
You should identify the level of risk you’re willing to take on before considering investing. For example, your appetite for risk might be lower if you’re five years away from retiring, compared with someone just starting out in the workforce.
Managed funds are regulated investments, which means they are monitored by the Financial Markets Authority (FMA). The FMA licenses fund managers and checks that they’re complying with the law.
All managed funds have some must-read documentation for would-be investors.
Tip: It can be a red flag if a fund often changes managers.
When you’re researching a fund:
Tip: Sorted Smart Investor provides a snapshot of risk levels, fees, returns and other information for 409 managed funds.
If you’re looking for an ethically managed fund, you’ll need to do extra digging.
There’s no standard definition of “ethical” or “responsible” investment – and what the fund manager considers A-okay may not pass muster with you.
Most funds claiming to offer ethical investment use “negative screening”, an approach that excludes investment in specific sectors – for example, tobacco or other “sin” stocks.
If a managed fund is making ethical claims, it should be upfront with you about its investment approach and what it’s doing to deliver on advertised outcomes. You should expect to get regular reports on progress.
All managed funds must list their top 10 holdings in their quarterly fund updates. To do a deeper dive, you can find a list of the fund’s full portfolio holdings on the Disclose Register. Funds are required to file returns every six months.
If a company makes misleading ethical investment claims, it could find itself taken to court by the FMA. The FMA’s powers also include issuing a stop order. A business failing to comply with a stop order can be fined of up to $300,000.