Investing can feel overwhelming, especially for beginners. With so many options on offer, it's easy to get lost in financial jargon, not to mention the maze of admin.
One of the most accessible ways to start investing in New Zealand is through managed funds. These professionally managed investments allow you to grow your wealth without needing to pick shares or bonds yourself.
Managed funds offer professional management, diversification and accessibility, making them a good option for building long-term wealth.
In this simple guide, we'll break down what managed funds are, how they work, the best things about managed funds (as well as the risks) and how you can get started growing your wealth through managed funds.
What is a managed fund?
A managed fund is a type of investment where multiple investors pool their money together. Instead of picking individual shares yourself, you buy units in a fund.
The fund is run by a professional fund manager, who invests this pool of money in a range of assets, such as equities (shares), bonds, and property.
The goal of a managed fund is to generate returns over time. The value of your investment changes based on the fund's performance.
How do managed funds work?
In a nutshell, here are the main steps of a managed fund:
- Investors contribute money – you can invest a lump sum or make regular contributions.
- Fund managers invest the money in line with the target investment mix, and monitor the fund’s performance.
- The fund may charge you fees, which are deducted automatically from your investment. The government deducts tax annually from your returns, according to your PIR (prescribed investor rate). Read more about tax.
- The value of the fund increases over time, and that’s how you make a profit. However, it’s important to remember, the markets go up and down, and your returns can be negative as well as positive. Luckily, history shows that over the long term, markets generally rise and returns increase.
The 20th century had its fair share of tough times, but the market kept growing. Warren Buffett explained it well:
“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow [the US share market index] rose from 66 to 11,497.”
5. You can buy or sell units whenever you like. When you're ready to take your money out, you’ll get the current value of your investment (the current unit price).
Who manages the funds?
At Generate we have an expert investment team who manage our funds. They carefully research, analyse and select investments based on the fund’s strategy and target investment mix.
A target investment mix is the percentage of growth assets (higher risk) and the percentage of income assets (lower risk). A more aggressive fund has a higher proportion of growth assets while a more conservative fund is weighted more towards income assets. You can find out more about a target investment mix, growth assets and income assets here.
Our investment team at Generate are active managers. This means they research, analyse, then make investment decisions in order to outperform the market.
We’re proud of their consistently strong returns, even though there can be short-term blips in times of difficult market conditions. You can see our Managed Fund performance here.
Some managed funds are passive funds, which means they simply track a market index and follow it, without any active management. That’s not the case for Generate Managed Funds. Read more here about active versus passive investing.
Managed funds and risk
The type of managed fund you choose will largely determine how much risk you assume.
- Growth funds invest more in shares and aim for higher returns but come with higher risk.
- Conservative funds focus on bonds and cash for lower risk and more stable returns.
However no matter how conservative the fund is, as with all investments, the risk is never zero. And while it’s useful to look at a fund’s history, past performance does not guarantee future results.
Click here to see Generate’s different managed fund options and their target investment mixes.
The best things about managed funds
To help you decide if they’re right for you, here are some of the best things about managed funds as well as some considerations that are important to know.
Pros
Professional management – You can let the experts handle investment decisions, saving you time, effort and worry. With Generate Managed Funds, your investment is expertly managed by our experienced fund managers, who have the knowledge and expertise to make informed investment decisions.
Potential for higher returns - Compared to traditional fixed-interest savings accounts or term deposits, managed funds generally offer higher returns over the long term. This makes them one of the best investment options for those looking to grow their wealth over time.
Ease of use – Once you have chosen a fund and invested your money, fund managers take care of the rest. This makes managed funds one of the best options when you don’t have the time, patience, expertise or just interest in researching and actively managing your investment.
Flexibility - Investors can generally deposit or withdraw funds at any time, making them a more accessible investment option compared to other types of investments that may have lock-in periods or break fees, such as KiwiSaver or a term deposit.
Diversification – Managed funds typically invest in a wide range of assets across different sectors and markets. This diversification reduces risk compared to investing in a single asset (e.g. one company or a particular bond), helping to minimise the effect of losses with gains.
Access to a variety of investments - Through managed funds, investors can access asset classes that might otherwise be difficult to invest in directly, such as wholesale funds, international markets, property, or specialised industries.
Regulatory compliance and peace of mind. In New Zealand, managed funds operate under financial regulations and compliance standards, ensuring that investors' money is handled responsibly. They are governed by financial market laws that help protect investors and maintain transparency.
Considerations
Less control – You don’t choose your individual investments; the fund managers do. However, for most people this is a good thing, rather than a drawback as you’re leaving it to experts and eliminating the worry.
Market fluctuations – Investing in managed funds exposes your money to the financial markets, which can go up and down. Financial markets are influenced by things like economic news, interest rates, company performance, and global events – factors that are all out of the control of a fund manager. Investors need to be prepared for fluctuations in value, especially during economic downturns. A long-term investment timeframe is usually recommended.
This is the same for most investments and not unique to managed funds.
Less suitable for short-term investment. Because markets go up and down, managed funds are usually better suited to long-term investing. While you can access your money at any time, the value of your investment can change, so they’re not ideal if you’re after quick gains or might need to withdraw in a hurry. We don’t believe in get-rich-quick schemes or trying to time the market – smart investing is about staying focused for the long term.
No additional contributions from employers or government. Unlike some investment schemes such as KiwiSaver, managed funds do not benefit from employer or government contributions. On the flip side, this means you don’t need to commit to a percentage contribution coming out of your salary or wages – how much you put in, or withdraw, is more flexible.
How to choose the right managed fund
Generate offers a range of managed funds to invest in. You can choose to invest in one or split your investment across multiple funds. Choosing the right Generate Managed Fund for you will depend on:
- Your investment goals – Are you saving for retirement, a house, or general wealth growth?
- Your time frame – Do you want to access your money in the short term, or are you wanting to build up wealth over the long term?
- Risk tolerance – How comfortable would you feel if the market dipped and your investment dropped in value? Would you be able to stay invested and ride it out, or would it make you anxious? Understanding your comfort with ups and downs helps you choose the right type of investment – especially since short-term drops are normal and tend to smooth out over time.
- Past performance – While not a guarantee of future success, past trends can be useful and demonstrate the expertise of the fund’s managers. Click here to see the past performance of Generate’s Managed Funds since inception.
Once you have chosen your managed fund, all you need to do is decide on how much and how frequently to invest. You can start with a lump sum or set up regular contributions. You can then monitor your investment in the Generate app and keep track of how your fund is performing (but remember, don’t get too invested in market ups and downs – a long-term approach is best).