3 Diversified Investment Options For Your Portfolio
12 May 2022When you’re looking for a diversified investment product, it’s easy to be overwhelmed by all the options.
Not only do you have to make decisions about what sectors you’re interested in, you also need to think about the underlying investment structure.
Should you go with the tried and tested managed fund, the flexibility of an exchange traded fund (ETF) or perhaps managed account?
While all these different options may seem confusing, it’s important to remember that ultimately, these are all just different ways of achieving the same goal. ETFs, managed funds and managed accounts are all vehicles that help to spread your investment across a sector or sectors. Essentially, helping you create diversification with your investment portfolio. The differences aren’t so much with what you invest in, but how you invest.
Related article: Opinion: To Diversify or Not to Diversify?
What is diversification?
Before we get too far ahead of ourselves, if you are not clear on what diversification is, let us break it down for you. Diversification is to ensure that your investments are spread across different products, sectors and even countries. For example, a diversified investment portfolio may have a mix of shares and bonds, international stocks and local ones and invests in the mining sector as well as consumer staples.
As different markets, sectors and investment products all react to economic factors differently, so when one is up the other may be down, diversification can help even out your returns.
With that background knowledge now in place, let’s explore three investment options that tend to do diversification quite well.
Managed Funds and diversification
Managed funds are still extremely popular with investors, having proved their worth for decades. Put simply, a managed fund pools your money with funds from other investors, which an investment manager then uses it to trade shares or other assets for you. Periodically you will receive a return on your investment, dependant on the value of the assets bought and sold by the fund manager.
Before you purchase a managed fund you can looks at the different investment products that fund invests in and get an idea of how diversified the fund is. Once you have settled on a managed fund, by investing in that fund you may have on your hands a well diversified investment portfolio.
There are two main types of managed funds to be aware of. Passive funds, which typically have lower fees, seek to match their holdings to an index, a measurement of a particular financial sector. With an active fund, your fund manager plays a more decisive role, picking and choosing which investments to buy and sell in an attempt to outperform the market. Actively managed funds are the more plentiful in Australia, and usually attract higher fees.
Related article: Active Vs. Passive Investing – What’s the Difference?
| Provider | Fee for $15K trade* | Ongoing fees# | Trade with live prices^ | |
|---|---|---|---|---|
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$15.00 | Yes | Yes |
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$7.50 | Yes | Yes |
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$14.98 | Yes | Yes |
View all Canstar rated Online Share Trading products. View Disclosures.
* Online brokerage fee for a $15,000 trade based on the number of transactions specified in the search inputs
# Ongoing fee for the account. There may be waivers and discounts subject to account use
^ The ability to view and trade on live prices
ETFs and diversification
Exchange traded funds are similar to managed funds. Instead of buying directly from the fund manager, ETFs are traded on the Australian Stock Exchange (ASX) like company shares. ETFs will often track a particular index, like the ASX200, which provides a good level and diversification and also offers great transparency about their holdings. Whereas managed funds will perform transactions once a day, ETFs are traded constantly with prices available in real-time. Due to the straightforward way that investment decisions are made, ETFs will typically have lower management fees than managed funds.
Related article: Which ETFs Have the Highest Return on Investment?
Managed accounts and diversification
A relative newcomer in Australia, managed accounts are seeing a rapid rise in popularity. Unlike both managed funds and ETFs, your investment in a managed account isn’t pooled, but instead tailored to your preferences by the account manager. Due to this personal approach, a managed account will likely require a higher initial investment and higher management fees than either a managed fund or an ETF. However, because you retain direct ownership of your investment you may be able to manage your tax liabilities more effectively than with other investment vehicles.
So, which fund is right for you?
| Managed Funds | ETFs | Managed Accounts |
|---|---|---|
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Which diversified investment option suits you best?
Except for some exotic options, the choice on whether to invest in a managed fund, managed account or an ETF to achieve diversification is a matter of how to invest, not what to invest in. Typically, a managed fund is well suited to those who prefer a fairly hands-off investment at the expense of flexibility. In contrast, an ETF offers that flexibility, but often requires a bit more of a hands-on role.
Finally, a managed account generally offers a personally tailored investment option, but also requires a greater investment. Therefore, the choice comes down to your own investment requirements – how much do you have to invest, what are your financial needs and how much are you willing to pay?
This is an update of an article originally published by Tim Smith.
Cover image source: William Potter/Shutterstock.com
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