What Are Managed Funds and How Do They Work?

Managed funds offer a popular investment avenue for individuals seeking professional oversight of their capital. These financial products gather money from numerous investors, consolidating it into a single pool. This pooled capital is then managed by experienced professionals who aim to achieve specific investment objectives on behalf of all participants.

Defining Managed Funds

A managed fund is an investment vehicle that pools money from multiple investors to create a larger, collective sum. This aggregated capital is then invested in a diversified portfolio of securities, such as stocks, bonds, or other assets, according to a predetermined investment strategy. The defining characteristic of these funds is the “managed” aspect, meaning investment decisions are made by professional fund managers.

Unlike direct investing where an individual buys and sells specific stocks or bonds, a managed fund allows investors to gain exposure to a broad range of assets through a single investment. This approach offers investors the benefit of diversification, spreading risk across various assets and sectors, which is often difficult for individual investors to achieve independently with smaller sums.

The underlying assets within a managed fund can vary widely, from domestic and international equities to fixed-income instruments like government or corporate bonds, and even alternative investments. Each fund specifies its investment focus and risk profile, allowing investors to choose options that align with their personal financial goals and risk tolerance. This structure enables individuals to participate in complex investment strategies that might otherwise be inaccessible.

How Managed Funds Work

Managed funds operate through a structured process where investors purchase “units” or “shares” in the fund, representing a proportional ownership stake in the fund’s overall portfolio. When an investor buys into a managed fund, their money contributes to the collective pool, which the fund manager then deploys into various securities. The value of these units fluctuates based on the performance of the underlying investments within the fund.

Professional fund managers, or a team of managers, are responsible for executing the fund’s investment strategy. Their duties encompass extensive research into potential investments, selecting assets that align with the fund’s stated objectives, and continuously monitoring market trends and economic conditions. These managers also handle asset allocation, determining the optimal mix of different asset classes to meet the fund’s goals while managing risk.

The value of each unit in a managed fund is determined by its Net Asset Value (NAV). The NAV represents the per-unit market value of all assets held by the fund, minus its liabilities, divided by the number of outstanding units.

Investors receive a prospectus, a legally required document that details the fund’s investment objectives, strategies, risks, and financial information. This document also outlines the fund’s management team and their backgrounds, providing transparency regarding who is making the investment decisions. Understanding the information contained within the prospectus is important for investors to assess whether a fund aligns with their financial objectives and risk tolerance.

Common Types of Managed Funds

The landscape of managed funds includes several common types, each with distinct characteristics regarding how they are traded and structured. Mutual funds are the most widely recognized form of managed fund. They are bought and sold once a day at their Net Asset Value (NAV), which is calculated at the end of the trading day. This means that when an investor places an order to buy or sell mutual fund shares, the transaction will be executed at the NAV determined after the market closes, not at a real-time price. The exact price an investor receives or pays is not known until after their order is placed and the NAV is calculated.

Exchange-Traded Funds (ETFs) represent another prevalent type of managed fund, differing significantly from mutual funds in their trading mechanism. ETFs trade on stock exchanges throughout the day, much like individual stocks, allowing investors to buy and sell shares at market prices that fluctuate continuously. This intra-day trading capability provides investors with greater flexibility compared to mutual funds, which only price once daily.

While mutual funds and ETFs are the most common for individual investors, other managed fund structures exist. Closed-end funds issue a fixed number of shares through an initial public offering and then trade on exchanges like stocks, often at a premium or discount to their NAV. Hedge funds are private investment funds that employ a wider range of investment strategies and are accessible only to accredited or institutional investors due to their complex nature and higher risk profiles.

Understanding Managed Fund Fees

Investing in managed funds involves various fees and expenses that can impact an investor’s overall returns. The primary cost is the management fee, also known as the expense ratio. This annual percentage is deducted from the fund’s assets and covers the costs of professional management, administrative services, and operational expenses. For example, the average expense ratio for equity mutual funds was approximately 0.40% in 2024, while index equity ETFs had an average expense ratio of about 0.14% in the same period.

In addition to ongoing management fees, some managed funds charge sales charges, often called “loads.” A front-end load is a commission paid at the time of purchase, ranging from 3% to 8.5% of the invested amount, and it reduces the capital immediately invested in the fund. Conversely, a back-end load, or contingent deferred sales charge (CDSC), is a fee paid when shares are sold, often decreasing over time the longer the shares are held. Funds that do not impose these sales charges are known as “no-load” funds.

Other potential costs include 12b-1 fees, which are annual marketing and distribution fees deducted from fund assets, capped at 1%. Trading costs, which arise from the fund manager’s buying and selling of securities within the portfolio, are also embedded within the fund’s operating expenses and indirectly borne by investors. Understanding these fees is important because they directly reduce an investor’s net returns.