What is a Managed Fund?
A managed fund is an investment fund that is managed professionally by an expert fund manager who invests in a variety of investments. The actual type and mix of investments within the fund depends on a predetermined mandate communicated by the Fund Manager.
With managed funds, your money is pooled together with that of other investors to create a single fund that provides significant investor benefits, which include an instant increase in buying strength.
There are five main types of managed funds:
- Portfolio Investment Entities (PIEs) including KiwiSaver
- Unit Trusts
- Group Investment Funds (GIFs)
- Superannuation Funds
- Insurance Bonds
There are a number of legal, tax and ownership differences between the types of managed funds. The one that is most suited to your requirements will depend on your current financial and tax situation and also your predetermined objectives. Below is a brief summary of each fund category.
A portfolio investment entity (PIE) is a type of entity, such as a managed fund, that invests the contributions from investors in different types of investments.
New tax rules have allowed eligible entities to become PIEs from 1 October 2007.
An eligible entity that elects to become a PIE will generally pay tax on investment income based on the prescribed investor rate (PIR) of their investors, rather than at the entity's tax rate. Your PIR is worked out on your taxable income in the last two income years and may be lower than your marginal tax rate.
For example, if you normally pay tax at 33%, you will only pay 28% on your income from a PIE fund.
For more information about Portfolio Investment Entities please visit the IRD website.
A unit trust works by pooling money from a number of investors and then using this money to buy a variety of investments. It gives you greater buying power, allows you to share costs and gives you the benefits of professional management.
When you invest, you buy 'units' - and the cost of each unit is the 'unit price'. The unit price moves up and down to reflect the value of the investments in the fund. Many income funds' unit prices stay at $1 as profits or income is distributed.
They are governed by the Unit Trusts Act 1960, which protects the interests of unit holders. A Unit Trust is constituted by a Trust Deed, a formal document setting out the rules by which the Trust must operate.
A group investment fund is also an investment where individuals pool their money together to create greater buying power, cost sharing and take advantage of professional management.
In most cases they are compared directly with Unit Trusts. However there are differences.
While Unit Trusts require a separate Trustee Corporation that is independent from the Manager to be the trustee for the fund, a GIF's trustee and manager is one in the same.
The more conservative nature of many Trustee Corporation clients has meant that GIFs have traditionally been biased toward fixed interest and mortgage security type investments. This can be compared with a wide array of equity investments offered by Unit Trusts. However, the Trustee Amendment Act has given GIFs more scope and there is an increasing range of investments available through the GIF structure.
Generally GIFs aim to provide both growth in unit value and to distribute some income to investors.
Investors in superannuation Funds usually set or have set for them a date at which their investment matures. This is usually a nominated retirement date or is based on the unit holder's age.
Most Superannuation Funds either require or give the option to have a proportion or all invested funds locked in until maturity. Normally these locked funds can only be accessed under special conditions such as death, disability, redundancy or when the fund reaches maturity.
Superannuation Funds tend to be focused more toward conservative investments. The large majority of funds available are cash, fixed interest and conservative balanced funds.
Many Superannuation Funds offer fund options that contain assurances that the investment value will never fall. These funds therefore tend to be for very risk averse investors.
"Insurance Bond" is the expression used to describe the range of investment-linked policies offered by several life insurance companies. Whilst technically they may be life insurance policies, insurance are more appropriately regarded as managed investments that possess the flexibility of unit trusts but are taxed differently by reason of their insurance status.
If the bondholder dies, his or her investment and any earnings are returned to the estate tax free, less any charges. A small portion of an investors funds is generally used to pay for a small amount of attached term insurance.
The functioning of insurance bonds is very similar to that of unit trusts. By purchasing insurance bonds, the bondholder gains entitlement to units in a fund in proportion to their contribution. From this fund, a range of investments is purchased, including real estate, shares and interest bearing securities and is professionally managed by a fund manager the same as a unit trust manager.
The value of the bond reflects the underlying value of the investment portfolio. The bond price will change in line with fluctuations in the value of underlying investments.
The bonds are structured to provide capital growth without any income returns. Income on investments accrues to the fund and is not distributed, but reflects itself in the growth in the value of the units. The only way to receive the benefit of this return is to redeem units.