Stock Mutual Funds or Managed Share Funds
Allow for greater diversification!

Stock mutual funds or managed share funds are investments where individual investors pool their money with other investors. The name used to describe the funds depend on the country. 'Mutual fund' is the term referred to in the US, whereas the term 'managed share fund' is used in Australia.

The discussion here relates to both terms with specific reference to stock market related funds.

Professional share investment specialists, referred to as fund managers, then manage these funds, re-investing the proceeds and distributing returns. So there is no requirement for direct stock investing on the part of the investor.

There are a variety of equity mutual fund or share fund types for managed-fund or mutual-fund investors to choose from.

Of all the types of managed share funds available, I prefer absolute return share funds which are similar to hedge funds.

Closed end funds, sometimes called closed end mutual funds, behave more like stocks because they trade on an exchange and the price is determined by market demand after an initial IPO process.

Closed-end funds can trade below their net asset value or above it. They are called listed investment companies (LICs) in Australia.

Mutual funds are usually referred to as open ended funds as they allow new units to be purchased.

The best rated mutual funds can be accessed from websites such as Morningstar that are involved in tracking mutual funds. At this site you can compare mutual funds.

It is a common practice for investors to seek out high yield mutual funds to invest in based on the previous year's performance. However the top ranked mutual funds for one year have a habit of not providing the best performance in following years. Past performance is not a good predictor of future performance.

Share funds are not only available domestically, but there is a wide variety of international share funds available.

All managed funds have a Product Disclosure Statement (PDS) which explains where the fund invests your money, as well as outlining the investment or management style of the fund manager.

By pooling your money with other investors, share funds have the buying power to invest in a wider range of share holdings than an individual investor. This provides greater diversification.

And instead of the individual investor spending her or his own time and money researching and administering their investment, managed funds use skilled and experienced professionals to do this on their behalf.

When you invest in a share fund, you are allocated units based on the amount invested divided by the current unit price of the fund.

The unit price varies daily depending on the value of the share portfolio held in the managed share fund.

This makes them different in a number of respects from listed investment companies (LICs)that can be traded on the stock market.

There are a variety of investment or management styles available to investors in managed share funds.

Which style you favour will depend on your objectives, your risk profile and what level of fees you are happy to accommodate.

Examples of cases where managed funds may provide a benefit over direct share investment include the availability of the top international mutual funds. It is difficult for individual investors to gain information on international companies operating in overseas markets.

The same applies to emerging markets mutual funds that are becoming viewed as a separate asset class by superannuation funds.

Another example may be where an investor uses a small market capitalisation (small-cap) share fund to gain a diversified exposure to the small-cap sector rather than making a direct share investment in one or a few small-cap companies.

Index funds that track the stock market index are suited to passive investors and those who are time poor. They are also a convenient way to have money invested in the stock market if you are a beginner investor.

John C Bogle in his book Common Sense on Mutual Funds (see above) recommends investors use index funds in order to minimise turnover and costs and take a longer term view.

His advice regarding actively managed funds, if you intend to use them, is to avoid conservative index hugging ones and go for very active managers with unusual portfolios and low fees.

A type of fund that is similar to an index fund in that it tracks the index of a wide variety of securities is the exchange traded fund. iShares are exchange traded funds.

There are a number of ways in which a share portfolio, including managed funds, can be managed by an investment manager on behalf of the individual investor.

A Separately Managed Account (SMA) is one example which is considered to be very tax effective.

Investors need to weigh up the advantages of managed funds against the management fees that need to be paid and the loss of control that results from handing over your hard-earned money.

Because of the size of some funds, the possibility of achieving significant outperformance may also be restricted.

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