Shares v. Managed Fund

With 'Reporting Season' recently ending and financial markets nearing all-time highs, we have increasingly been discussing the key differences between Shares and Managed Funds. Our article below looks at the differences between investing in shares and managed funds, along with the potential benefits of each investment structure.

Direct Share

When you invest in shares, you become a partial owner of the company. Each share represents a portion of ownership (hence the name 'share') in the company. The more shares you own, the larger your ownership in the company.

Owning direct shares provides you with the autonomy to decide which specific company to invest in. You actively choose when to buy and sell your shares based on your own research or conviction.

The return from a share typically comes in two forms:

1. The share price - The value of each share may rise and fall over time due to market conditions, company performance and economic factors. Investors typically invest in shares they believe will increase in value over time.

2. The income or dividend paid per share. Like share prices, dividends may rise and fall over time and are typically paid from the profits of a company.

Where you will only realise the value from an appreciating (or depreciating) share price at the time of the sale, dividends may provide an investor with ongoing income that can either be paid in cash, or reinvested.

Diversification is the practice of spreading your investments across different assets, industries and regions to lower your risk and increase your chance of stable returns. This can be difficult to achieve when purchasing direct shares given the significant lump-sum required to adequately diversify your portfolio.

With the prevalence of online share trading platforms, buying and selling shares has never been more convenient or cost effective. Online trading platforms also provides investors with complete visibility of their portfolio during market  hours.

The primary cost of direct share ownership is in the brokerage cost - the cost at the time of buying or selling a share. There are typically no ongoing costs for direct share ownership outside of any additional or premium services provided by an online trading account.

Managed Funds

Managed Funds are a 'pooled' investment structure, where many investors invest in a fund for a professional manager to make investment decisions on your behalf. Due to the size of these funds, diversification of your investments can be easier to achieve with smaller balances, providing exposure to different assets, industries, regions and even investment styles.

The role of a fund manager is to analyse markets, select investments and manage a portfolio to take this burden off individual investors. As a result, this type of investment can be ideal for investors who prefer professional expertise and guidance.

Similar to shares, Managed Fund profits can be made by the increase in the unit price of the fund. Distributions (income payments) may also be paid and may be taken as a cash payment, or reinvested in the underlying fund.

Unlike with direct shares, Fund Managers charge a fee for their professional management of a portfolio. This is typically levied as a percentage of your total amount invested in each fund. Costs are typically lower for a passive or index approach to investing (investing in the broader market or theme) and increase for more active investment management.

Which is right for you?

• Shares typically suit those investors looking for more control over their investments or those who are comfortable in researching and making their own investment decisions.

• Managed Funds typically suit those investors who would prefer to outsource their investment approach, or those seeking professional management to increase diversification or convenience.

As with all investments, there is no 'one size fits all' approach. If you would like to discuss which option may be suitable for you, don't hesitate to contact us.