What Is a Managed Fund and How Does It Work?

Managed funds pool capital from numerous investors into a single fund. These funds are professionally managed, offering individuals access to a diversified portfolio of assets. They provide a mechanism for collective investment, allowing access to various markets and securities.

How Managed Funds Work

A managed fund pools money from many individual investors, creating a substantial capital base. This collective sum is then invested by a professional fund manager or a team of managers. Their objective is to achieve specific investment goals, such as capital appreciation, income generation, or a blend of both, on behalf of all participants.

The fund manager makes all investment decisions, including which securities to buy, hold, or sell, based on the fund’s stated investment strategy. This professional oversight aims to optimize the portfolio’s performance according to its predefined objectives. Diversification is an inherent characteristic of these pooled investments, as the fund invests across a range of different assets or securities, spreading risk across various holdings. This allows investors to gain exposure to a broader market segment than they might achieve independently with smaller sums.

The fund’s assets are held separately from the fund management company’s assets, often by a custodian, providing a layer of security for investors.

How Investors Engage with Managed Funds

Investors engage with managed funds by purchasing “units” or “shares.” Each unit represents a proportionate ownership stake in the fund’s underlying portfolio of assets. The value of these units is determined by the fund’s Net Asset Value (NAV), which is calculated by subtracting the fund’s liabilities from its total assets and then dividing by the number of outstanding units. The NAV per unit fluctuates daily based on the market value of the fund’s holdings.

Investors receive returns through income distributions, which may come from dividends generated by stocks or interest earned from bonds held within the fund. Funds may also distribute capital gains when the fund sells securities for a profit. These distributions can be paid out to investors or reinvested back into the fund to purchase more units.

When an investor wishes to exit their investment, they redeem or sell their units back to the fund. The redemption price is based on the fund’s NAV at the time of the transaction, minus any applicable fees. Managed funds in the United States commonly operate under legal structures such as mutual funds or unit investment trusts, which dictate how the fund holds assets and issues units to investors.

Types of Managed Funds

Managed funds are categorized based on their investment focus and strategies.

Investment Focus

Equity funds invest in company stocks, aiming for capital growth.
Bond funds concentrate on fixed-income securities, such as government or corporate bonds, prioritizing income generation and capital preservation.
Money market funds invest in short-term, highly liquid debt instruments, providing a stable option for cash management.
Balanced funds invest in a mix of both stocks and bonds, seeking a blend of growth and income.
Sector or Regional funds specialize in particular sectors (e.g., technology, healthcare) or geographical regions (e.g., international, emerging markets).

Management Approach

Actively managed funds employ a manager or team to make investment decisions with the goal of outperforming a specific market benchmark.
Passively managed funds, also known as index funds, aim to replicate the performance of a particular market index, such as the S&P 500, by holding the same securities in similar proportions.

Managed Fund Fees

Investing in managed funds involves various costs that can influence an investor’s overall return.

Expense Ratio

The Management Expense Ratio (MER) or Expense Ratio is an annual fee covering the fund’s operating expenses, including management fees and administrative costs. This ratio is expressed as a percentage of the fund’s assets and is deducted directly from the fund’s assets before returns are calculated. Expense ratios can vary widely, ranging from 0.05% for passively managed funds to over 2% for some actively managed or specialized funds.

Load Fees

Some managed funds charge sales commissions, known as “load fees.” A front-end load is a charge paid at the time of purchase, typically deducted from the initial investment. A back-end load is incurred when units are sold, often decreasing over time the longer the investment is held.

Other Fees

Funds also incur internal trading costs when buying and selling securities within the portfolio, which are not directly charged to investors but affect the fund’s overall performance. Some actively managed funds may also charge performance fees if the fund’s returns exceed a predetermined benchmark. These fees are generally outlined in the fund’s prospectus, which details all associated costs and charges.