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Managed Funds For Dummies®

Table of Contents

Managed Funds For Dummies®

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About the Author

Colin Davidson has worked in financial services for more than 20 years, both in Australia and overseas, in London and Asia. A qualified chartered accountant, Colin worked in Hong Kong as a stockbroker selling equities to global and regional fund managers. In Australia, he has managed a major bank’s online stockbroking business and Australia’s largest direct managed funds broker. Currently working at one of Australia’s largest full-service retail stockbrokers, Colin is RG146 accredited and a Responsible Executive managing the broker’s financial planning business. He co-wrote the 2005 and 2006 editions of Australia’s Top 100 Managed Funds.

Dedication

To the family, Louise, James, Ella, Alex, Claudia and Blossom, and to those gone but not forgotten, Jean and Marguerite, go well.

Author’s Acknowledgements

Something I hadn’t appreciated when writing this book was how much of a collaborative effort the whole process would be. Thanks to Bronwyn Duhigg who, before she left John Wiley, originally approached me to write the book and guided me through the commissioning process. Thanks to Rebecca Crisp for the subsequent direction and always kind words of encouragement, and to Hannah Bennett, the publishing equivalent of a footy coach, expertly guiding from the sidelines. Thanks to Kerry Davies, project editor extraordinaire, for the ever-wise suggestions, who somehow magically pulled everything together. Thanks also to Zoë Wykes in the United States for the fresh perspective with the final edits, and to Glenn Lumsden for the great cartoons!

Thanks also to Angus Robertson, financial adviser at Bell Potter Securities, for the technical review of the book. With many years’ experience advising clients on superannuation and managed funds, Angus brings a tremendous amount of experience to the book. Thanks finally to Louise, who read chapters, offered advice and was given a good excuse to regularly lock me away in the study until I’d met my deadlines. I’m sure the family enjoyed the peace.

Publisher’s Acknowledgements

We’re proud of this book; please send us your comments through our online registration form located at .

Some of the people who helped bring this book to market include the following:

Acquisitions, Editorial and Media Development

Project Editor: Kerry Davies

Acquisitions Editors: Bronwyn Duhigg, Rebecca Crisp

Technical Reviewer: Angus Robertson

Editorial Manager: Hannah Bennett

Production

Graphics: Wiley Art Studio

Cartoons: Glenn Lumsden

Proofreader: Catherine Spedding

Indexer: Michael Ramsden

The author and publisher would like to thank the following copyright holders, organisations and individuals for their permission to reproduce copyright material in this book:

• Page 49: © Industry Super Network

• Page 70: © Standard & Poor’s ‘Index Versus Active Funds Scorecard: Australia Year-End 2009’.

• Pages 131 and 132: © Morningstar Australasia

• Page 150: © BT Financial Group

• Page 155: © Responsible Investment Association Australasia (RIAA)

Every effort has been made to trace the ownership of copyright material. Information that will enable the publisher to rectify any error or omission in subsequent editions will be welcome. In such cases, please contact the Permissions Section of John Wiley & Sons Australia, Ltd.

Introduction

When I started writing this book at the beginning of 2010, global stock markets were emerging from one of the worst periods since the 1929 Wall Street Crash in the United States. Investors’ portfolios had been decimated by the global financial crisis (GFC) of 2007 and 2008. The performance of many fund managers had fallen off a cliff and the funds management industry had gone through a shakeout. The crisis highlighted the fund managers who deserved their fees and exposed the mediocre — those who had been carried along by the 2003 to 2007 bull market.

As a result of the crisis, investors who stayed in managed funds fled to safety and switched their investments into cash, earning a pittance from the lowest interest rates Australia had seen in years. Investors lost confidence in the markets and especially in the fund managers who were supposed to be growing their money. As markets recovered, investors returned slowly, not so much to managed funds but to owning shares directly and looking after their own money.

So, all-in-all, a great time to start writing a book about managed funds!

Although the GFC should make everyone more cautious, it shouldn’t stop people investing. In fact, the GFC has highlighted the need for professional fund managers. In Managed Funds For Dummies, I look at how fund managers provide consistency of method and a disciplined approach to managing money.

About This Book

I wrote Managed Funds For Dummies as a plain-speaking and practical guide to managed funds. The book is aimed at anyone new to managed funds — or investing for that matter — and who might not know where to start. And just because you may use a financial planner to invest doesn’t mean you won’t find the book useful. This book helps you ask the right questions and, importantly, understand the answers.

Without wanting to sound like a politician, Managed Funds For Dummies especially targets the everyday Mum and Dad investor trying to save for a better future, for themselves and their children. Many investors want to manage their own investment decisions, and this book is a good starting point for the DIY investor — even more experienced investors who may want to brush up on their managed funds knowledge. It is certainly not meant to replace qualified professional advice!

Fund managers have a certain air of mystery about them. They’re a naturally secretive bunch, but who can blame fund managers for wanting to protect the way they make money? I aim to peel away some of the mystery and show investors what they need to know about fund managers and their funds before they invest.

The book refers to a number of the major fund managers in Australia and around the world. Longevity in the marketplace and size usually dictate which managers I mention. Investors are bound to come across the names in advertising, when talking to a financial planner or even through a quick search of the internet.

The industry is changing, and none more so than in 2010. Fees and commissions are the big talking point, as is the desire to make everything simpler and easier to understand. Hooray to that! Legislation will change some of the things I’ve written about in this book over the next couple of years. I’ve foreshadowed those changes where possible and explained the likely impact for the investor.

Conventions Used in This Book

To help you get the information you need as fast as possible, this book uses several conventions:

check.png Bold words make the key terms and phrases in bulleted lists jump out and grab your attention. They also indicate the action part of numbered steps.

check.png Italics signal that a word is an important defined term.

check.png Monofont is used to signal a web address.

When this book was printed, some web addresses may have needed to break across two lines of text. If that happened, rest assured that no extra characters (such as hyphens or spaces) are used to indicate the break. So, when using one of these web addresses, just type in exactly what you see in this book, pretending that the line break doesn’t exist.

check.png Sidebars, text separated from the rest of the type in grey boxes, are interesting but slightly tangential to the subject at hand. Sidebars are generally fun and optional reading. You won’t miss anything critical if you skip the sidebars. If you choose to read the sidebars, though, I think you’ll be glad you did.

I use some terms interchangeably in the book. So a fund manager can refer to the actual company that has legal responsibility for a managed fund, but can also refer to the actual person who manages the fund. The context should make it obvious which is which. The term financial adviser is interchangeable with financial planner, and refers to anyone who is legally qualified to give financial advice. Stocks and shares also refer to the same thing.

Foolish Assumptions

When I sat down to write this book, I thought long and hard about who would pick it up and read it. Here are a few assumptions I made that may apply to you:

check.png If you’re reading this book, you have an interest in investing and, in particular, in managed funds.

check.png You may have no knowledge whatsoever about managed funds other than seeing the occasional advertisement and wondering what they’re all about.

check.png You may be an industry professional taking a quick flick through the pages, maybe even a fund manager, but perhaps that’s assuming too much!

check.png You want a book that covers every aspect of managed fund investing but can also give you the practical detail you need to go about investing. At the same time, you don’t want to wade through the finance industry double-speak that can leave investors perplexed. But you do need to understand some specific terms that go with managed funds, so I clearly explain each of these, with a handy glossary at the back of the book for quick reference.

check.png Last but not least, you want an independent view of managed funds, one that isn’t trying to sell you anything or convince you that only managed funds will do. So I give you a guide and a way to answer questions you may have about managed funds and whether they’re right for you. It may even help to answer questions you didn’t know you should ask until reading this book!

How This Book Is Organised

Managed Funds For Dummies covers virtually every aspect of managed fund investing, and I start by giving you an understanding of what a managed fund is and why investing in managed funds is different from investing in shares and property. When you understand that, then you can figure out what type of investor you are, do the research and then fill in the forms. The book also gives the once-over to investment strategies such as margin lending and how these strategies may have a place in your portfolio.

The book is organised in six parts, covering everything you need to know about managed funds in Australia and how to invest in them.

Part I: Coming to Grips with the Basics of Managed Funds

Part I starts with a view from the top, looking at what you need to know, the pros and cons of investing in managed funds and how they are structured. It also examines the importance of asset class and investment style, and rounds off with how much investing in a managed fund is likely to cost you.

Part II: Doing the Research for Your Peace of Mind

This part is all about you, examining what type of investor you may be and how to work out what level of risk you’re prepared to take when investing. I then look at how to set your investment goals, how you can research managed funds and what you need to look out for when judging if a fund is going to help you achieve your goals.

Part III: Choosing, Buying and Selling Managed Funds

Which comes first, choosing the fund or the fund manager? If you want to get to know the fund manager before choosing a fund, then this part explains the ins and outs. It also shows how you can invest either direct with a fund manager, via a financial planner or through a managed fund broker. I also give you practical hints on how to fill the forms in, as well as how to buy and sell funds.

Part IV: Determining How Funds Are Labelled

This part looks at the many ways managed funds are categorised by the industry. Increasingly, hedge funds are going mainstream and this part demystifies some of what they do. Administering your funds may not sound particularly exciting but knowing the services offered by fund managers and administrators is worthwhile, possibly saving you time and money.

Part V: Following Some Sensible Ideas for Happier Returns

So you’ve chosen your funds. This part examines what other strategies you may want to use to invest, such as borrowing to invest, regular savings plans and dollar-cost averaging. But what happens if it all goes wrong? This part explains who is keeping an eye on the fund managers and who to complain to if you’re not happy.

Part VI: The Part of Tens

Managed funds investing doesn’t need to be complicated and, in this part, I give a rundown of what to bear in mind before taking the plunge, including ten tips for getting you on the road to successful investing in managed funds, and ten traps and pitfalls — what the fund managers may not tell you and what you should look out for.

Glossary

The glossary of terms explains the key investing terminology around managed funds.

Icons Used in This Book

Everything in this book is worth reading, but some paragraphs may jump out at you as being an important piece of information to remember or a useful tip on managed funds. In the margins of the book, you can find the following icons marking certain paragraphs containing that special information. Here’s what they mean:

missing image fileRemember items are the yellow sticky notes of the book, the ones you should highlight with your own yellow marker. You’ll find these notes useful when completing a task — such as filling in an application form, or what to remember when using a financial planner.

missing image fileThis is the stuff that is a little bit technical — usually related to tax, fees or legal information — you don’t need to know this information but may find it interesting. If you want to know a bit more about how something works, then read this icon; if not, you can give it a miss and won’t be any worse off.

missing image fileA tip is a specific piece of advice on a particular topic. A tip may be a shortcut or some other helpful hint that may save you time, money or possibly heartache.

missing image fileWarnings are just that — a heads-up that you need to be aware of something that could get you into trouble, cost you money or affect the fund you invest in.

Where to Go from Here

Put the book to work for you straightaway! Thumb through the book to see what catches your eye or head to the Table of Contents or the Index to find a section or topic that interests you. Or just turn the page and dive right into Chapter 1. The choice is yours but, whichever way you go, I hope you enjoy — and benefit from — Managed Funds For Dummies.

Part I

Coming to Grips with the Basics of Managed Funds

Glenn Lumsden

missing image file

‘Which part of the park has the least scary rides?’

In this part . . .

Whether you know it or not, managed funds are very likely a part of your investing landscape. Contributing to a superannuation fund? Chances are you’re investing in managed funds. So, if for no other reason, getting to know managed funds could help you achieve a better retirement. Part I introduces managed funds, what to look out for and how to choose them.

As much as I’m a big fan of managed funds, you get to look at the cons as well as the pros of using managed funds here, and a dose of the legal stuff of how funds are structured, with a pinch of technical guff on top. This part also introduces some of the investing techniques used by professional financial planners and gets down to what we all want to know — how much it costs.

Chapter 1

Getting Started with Managed Funds

In This Chapter

arrow Understanding the basics of managed funds

arrow Finding out what fund managers actually do

arrow Doing the research before leaping into managed funds

arrow Making sure you know what to look out for

I’m going to indulge the accountant in me and throw around a few statistics about the size of the managed funds industry. The Australian industry has $1.7 trillion-plus in funds under management, with 10,000 and more funds available from over 130 fund managers, making it the fourth-largest managed funds industry in the world.

All sounds pretty impressive but what does it really mean for the average investor? That lots of advisers and people in the finance industry are raking it in with all the fees being charged? Possibly, but what is important is that the numbers show Australia has a thriving and world-class fund management industry offering a wide choice for investors, despite the effects of the global financial crisis.

Australia’s superannuation (often simply referred to as super) system drives much of the managed funds industry, and managing super drives much of people’s investing decisions. Saving for retirement is big business and that’s because it affects most of us in one way or another. Super should be front and centre of most people’s investment strategies. Understanding that managed funds can make up a fair chunk of your super, the need to know about managed funds becomes important.

In this chapter, I cover how managed funds can play a part in your investment portfolio — whatever your investment plans, whether saving for retirement or for a deposit on a house. Understanding what managed funds are, how to choose one and what to look out for can help make your investment decisions a whole lot simpler.

Making a Start with Managed Funds

A managed fund is a way of pooling together money from many investors into one big pot, called a trust. Investors then buy units in that trust. The company or person looking after the money in the trust — the fund manager — invests the money across a host of different types of investments, from cash and property to bonds and shares. Most managed funds are unlisted, meaning that they’re not traded on the stock exchange. However, a small number of funds are traded on the Australian Securities Exchange (ASX) as listed investment companies.

Considering managed funds beyond the GFC

The global financial crisis of 2008 to 2009 not only rocked the financial world; it also seemed to affect just about every aspect of our lives, including mine in setting out to write this book.

In investing terminology, writing a book on managed funds in early 2010 was the equivalent of buying at the bottom of the market. Things couldn’t get much worse — for the industry or for investors. Many funds, especially those in the property and mortgage sectors, were badly hit, freezing investors’ money. Many of these funds remain frozen while managers wait for the good times to return. So why would you even consider going back into the managed funds market after all that chaos?

The point is that markets go up and down, and the good times do return. Managed funds can and should have a place in people’s investment portfolios regardless of the fallout from the GFC. The superannuation industry in Australia is worth around $1.3 trillion and relies completely on markets that work and fund managers that perform well. As long as people and their employers are contributing to superannuation, skilled money managers and their managed funds will always be needed.

If there is a good side to the GFC, it is the lessons that might be learned by fund managers and investors alike. Poorly managed funds didn’t survive. Fund managers do make mistakes and do lose money, sometimes a lot. But occasionally you come across a manager who knocks your socks off performance-wise and who can deliver again and again. As an investor, these managers are the ones you want to seek out to manage your money, because these are the guys who genuinely add value to your investments over time.

Discovering that you’re probably using managed funds already

Before thinking about investing with managed funds, take a step back and look at the investments you have already. ‘Not a lot,’ you may think. But hold on. For many people — and I include myself in this — aside from the family home, superannuation is probably the largest, single and most important investment they have.

If you’re working for a company, you’re probably contributing to a super fund set up by your employer or perhaps an industry super fund. Most employer and industry funds are set up to invest mainly in managed funds, with very few offering direct share ownership. Often though, super is the forgotten investment; you have it because it’s the law. Thinking about your super probably only happens around tax time, when you get an annual statement telling you what your fund has been up to during the year.

missing image fileJust because your managed funds are in an employer super fund doesn’t mean you can’t manage them. Your super is important and managed funds are probably a big part of it. Getting to grips with some of the basics of managed funds can give you a better understanding of how to get your super working for you. See Chapter 3 for more on superannuation.

Including managed funds in your portfolio

‘Portfolio’ sounds like a word only the very wealthy would use, those with a private banker to cater for their every investing whim. Don’t be put off, as portfolio is just a way of identifying the money you set aside for investing. Managed funds are generally set up to cater for three distinct uses:

check.png Superannuation: Within your super account helping you save for retirement

check.png Pension: After you’ve retired, managed funds in your pension account that help to provide an income

check.png Investment: Anything that is not part of (outside) your superannuation and pension

missing image fileThe idea of investing inside or outside your superannuation and pension is important to understand. Using superannuation and pensions can be a way of minimising tax on your investments. If investing solely to fund retirement, superannuation is invariably the best way to go, and managed funds are set up to cater for super, pensions and investments.

Examining What’s Managed in Managed Funds

In the United States, managed funds are called mutual funds and in the United Kingdom they’re unit trusts. So why ‘managed funds’ in Australia? For once, the finance industry came up with a name that says exactly what the product does — it manages funds (money). Thankfully, no committee was involved in coming up with that name or who knows what we’d be calling them!

Lifting the lid on fund managers

Managing money involves both investment decisions and administration, regardless of whether a big company or an individual is looking after the money. Investing is about making your money grow or producing an income. Administration is keeping track of your money and having the right paperwork to complete your tax return. Fund management companies spend a lot of money trying to get right both the administration and the investing sides of the business.

Fund managers may have different styles of investing. Styles can include growth managers investing in stocks with long-term growth prospects, or value managers who look for investments believed to be relatively undervalued. Hedge funds are another style all together (see Chapter 16). All have different risk and return attributes so you need to know what you’re getting yourself into before you invest. Chapter 4 tells you more on investment styles.

missing image fileChoosing a fund manager is as much about performance as it is about a good reputation — that the manager won’t run off with your money — and good client service. Consistently good performance over a long period is the difference between a good fund manager and a great fund manager.

Finding out how fund managers earn a crust

Fund managers earn money mainly in a couple of ways. The first is charging fees as a percentage of your money. Every month the fund manager shaves off a percentage equivalent to anywhere between 0.9 per cent and over 2 per cent per annum. The actual amount depends on the type of fund and how expensive it is to run. Funds investing overseas charge more than funds managing cash investments, for example.

The second way fund managers earn money is from performance fees, although these funds are in the minority. Performance fees are charged if the fund makes a return greater than a pre-set hurdle rate, such as 8 per cent per annum. The fund manager takes a percentage — usually 20 per cent — of that additional gain. Fair enough. Giving the manager an incentive has to be good for both investor and fund manager.

missing image fileExpenses are taken from your investment monthly, taking a bite out of its performance. You won’t see the effect, however, until you get your statement at the end of the year. Check out Chapter 5 for more on fees.

Plunging into Managed Funds without Taking a Bath

Before you invest, you need to do a little self-analysis to work out what type of investor you are. Imagine buying a set of golf clubs and then realising you don’t like golf. This example might sound odd, because most people know whether or not they like golf. But getting to the point where you know what type of investor you are should be like knowing if golf is your thing or not.

Managing your risk and setting your goals

All investing is about managing risk, about planning for the worst but expecting the best. Risk is simply the chance of you losing money on your investment, and some investments can be riskier than others. For example, investing in developing countries can be akin to a white-knuckle rollercoaster ride. Investing in cash, however, is like a drive to the corner shops — not usually that eventful.

Different investment types are referred to as asset classes and, conveniently, each carries a different level of risk. Moving up the risk-and-return scale, cash is the least risky with lowest likely returns, followed by bonds and fixed interest, and then property, with Australian and international shares topping out the scale. Chapter 6 helps you work out your investor type.

Your attitude to risk — whether you’re happy to bet the farm or would prefer something a little more sedate — determines the managed funds best suited to you. Add to that what you’re trying to achieve — your goals — and a structure starts emerging to help select the most appropriate managed funds. For more on goal setting, see Chapter 7.

Thinking about what life stage you’re at can also influence your decision-making. The closer you get to retirement, the more likely you are to want to preserve the money you have and to start producing an income. The opposite is also true — the further away from retirement you are, the longer you have to recover from hits to your portfolio.

missing image fileThe bigger your goals, the more risk you’ll to need to take. At some point, though, taking on too much risk is no different from betting on the horses.

Picking managed funds from the myriad of options

With more than 10,000 managed funds to choose from, selecting managed funds can seem overwhelming at first. When you’ve matched your goals to your risk profile, you’re able to whittle away a fair chunk of that 10,000. But managed funds come in many different colours and flavours (see Chapters 14 and 15 for some of the standard, and not-so-standard fund types). And you also need to consider the reputations and performance of the fund managers themselves (see Chapter 10). So, how do you get to a shortlist of, say, a dozen funds to choose from? A dartboard is one option but the more usual way is to do some research.

Fortunately, managed fund research companies such as Morningstar Australia and Standard & Poor’s can help potential investors. Using an easy-to-understand five-star rating system, combined with a recommendation, the research companies allow investors to home in on the better-rated funds. The research companies also categorise managed funds as, for example, Australian equities large-growth funds, letting investors compare similar funds more readily.

missing image fileManaged fund research companies are not all the same. Each has a slightly different way of measuring and rating managed funds. However, all use a mix of past performance measures and a subjective (qualitative) judgement of how a fund is being managed. Chapter 8 gives more on the ratings agencies.

Conquering the paperwork and working out the costs

Now I’m getting to the pointy end — cost! You’ll discover most of the costs of investing in a managed fund in what’s called the product disclosure statement (PDS). Usually a fairly weighty document, sometimes in two parts, the PDS should tell you all you need to know about the funds you may want to invest in. From the legal stuff, like who’s responsible for investing the money, through to an overview of what a fund invests in and what it all costs.

The PDS usually has the application form at the back, as well as the financial services guide (FSG). The FSG is a short document setting out the fund manager’s services, the costs of using those services and who to complain to if you have a problem. Yes, it’s all exciting stuff! However, you must be given an FSG before you invest, as well as a PDS — it’s the law. Signing the application form means you acknowledge you have read and understood the PDS. See Chapter 12 for more on forms and the PDS.

So, where do costs come into this? Very near the beginning of a PDS usually. The PDS sets out what costs may be charged and even some that aren’t charged. The PDS should give an example of how the fees work and what you can expect to pay. The main costs are:

check.png Contribution fees: Paid when you set up a managed fund account and every time you contribute to it; usually up to 4 per cent of the amount you invest

check.png Management fees: An ongoing fee charged as a percentage of the value of your investment, typically around 1.5 per cent per annum

check.png Transaction fees: The difference between the price you buy a fund and the price you sell a fund, or the spread, typically around 0.4 per cent

missing image fileYou may be able to reduce or have rebated the entire contribution fee. You can ask the fund manager, negotiate with your financial planner or use a managed fund broker.

missing image fileThe other main cost of investing is tax. Managed funds don’t pay tax on any income or gain made from selling investments. Paying tax is, instead, left to the investor. How you judge the success or otherwise of an investment is the return you get after tax. Chapter 5 gives you the drill on tax and other costs of investing.

Some fund managers also offer administration services through what are known as master trusts and wrap accounts. These services offer a menu of managed funds from different fund managers, enabling investors to track several investments in one document. These services also allow access to funds whose minimum entry-level investment is too high for the average investor. Reporting includes all buys and sells of units, distributions by the fund (income), valuations and a tax statement. Of course, you can expect to pay an administration fee of anywhere up to 0.9 per cent per annum on the value of your investment. See Chapter 17 for more on these administration services.

Dealing with and Keeping Track of Your Investments

Investors have several options when buying and selling managed funds — going direct to the fund manager, using a financial planner or using a managed fund broker. It all boils down to personal preference. After you’ve bought your investments, you need to keep track of what they’re doing. Performance is why you’re investing, so you need to know a little about how it’s calculated. Chapter 13 tells you more about buying, selling and monitoring your investments.

Taking advice or going it alone

Investing can be complex and it’s not only about selecting a managed fund. With superannuation, the rules can be a minefield for the uninitiated and this is where a financial planner can help. Financial planners may charge a fee for their service or get paid from the commission that fund managers pay planners for investing your money with them, or a combination of both.

Others prefer to make their own decisions, either through a broker or by giving instructions directly to the fund manager. Managed fund brokers offer access to most of the major funds and also offer a rebate on some fees, such as the 4 per cent contribution fee. The other option is to go direct to the fund manager. Again, investors may get some fees rebated but usually only if they ask the fund manager. Take a look at Chapter 11 before making a decision on which way to go.

Tracking your fund’s performance

Managed funds have a reputation as set-and-forget investments, meaning you don’t need to look after them much once you’ve invested. Up to a point that is true. You do need to keep track of how the fund is going, making sure the performance is meeting your expectations. If you don’t, you run the risk of not meeting your goals when you need to. Chapter 9 helps you analyse performance figures.

Performance of a fund is made up of two parts — income and growth. Income is paid as dividends by the underlying investments, such as shares, to the fund. Growth is the increase in value of the underlying investments over a certain period. For example, XYZ fund shows a return of 10 per cent for the 12 months to 30 June 2010. Of that 10 per cent, 4 per cent is from dividends received and the rest is from the increase in value of the investments held.

missing image fileYou may be up for a tax bill on any part of the return — the income and the growth — from a managed fund, which must distribute all the income it receives to investors every year.

Adding some spice to your investing

Without too much fuss, you can take advantage of straightforward yet powerful investing techniques, potentially adding to your returns. Some of these are:

check.png Borrowing to invest: You can employ this strategy either through a margin loan or through a managed fund that is allowed to borrow to invest. This simple strategy can add a rocket to your investment’s returns. Equally, if you’re not careful, it can lose you a lot of money. Properly managed and with a full understanding of the consequences of it going wrong, borrowing to invest can be a way of growing your money faster.

check.png Compounding: A simple strategy for reinvesting any income you get back into the managed fund, this strategy is like earning interest on your interest.

check.png Dollar-cost averaging: Setting up a regular (fortnightly, monthly or quarterly) savings plan where you regularly contribute a set amount to the fund. This helps you save and, importantly, reduces the risk that you buy a managed fund when the market is high, only to see the price fall during the coming months.

Check out Chapters 18 and 19 for more on these investment strategies.

Knowing what to look out for and what to do if it all goes wrong

Nothing in investing is guaranteed, except taxes. The fund manager offering guaranteed returns needs to be approached cautiously. Somewhere behind the promise of a guaranteed return lies either a very long disclaimer with conditions attached, or someone who’s either extremely naive or out to take you for a ride. Some funds, known as capital-guaranteed funds, use complex derivative products to guarantee to give you at least your money back if the market takes a dive. But expect to have some conditions attached to that guarantee (Chapter 16 also explains these structured products).

missing image fileIf you don’t know or understand what you’re investing in, then don’t invest. Better to be safe than sorry. Some managed funds can be quite complex, especially capital-guaranteed products, with fees and structures that, although disclosed in the PDS, can be hard to fathom.

The Australian Securities and Investments Commission (ASIC) is the main watchdog for the managed funds industry in Australia. ASIC makes sure fund managers follow the rules. But, should your investment go horribly wrong through incompetence, then you can complain to the Financial Ombudsman Service (FOS). ASIC is likely to get involved if you lose money through fraud. When complaining, the first stop is the fund manager. If you can’t get what you expect from the fund manager, you can then go to the FOS, which acts as a mediator between the investor and fund manager.

missing image fileASIC’s consumer watchdog website, FIDO (), provides some great information on what to look out for before you invest. You can also turn to Chapter 20 for more information.