3 Diversified Investment Options For Your Portfolio

When 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 the new and much talked about 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 to diversifying your 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?

Managed funds

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 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.

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. In an active fund, your fund manager plays a more decisive role, picking and choosing what 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?

 

Compare Managed Funds

Exchange traded funds

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 track a particular index, like the ASX200, and thus offer 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?

Compare Exchange Traded Funds (ETFs)

Managed accounts

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.

Managed Funds Exchange Traded Funds Managed Accounts
  • Buy from a fund manager
  • Pooled with other investors
  • Usually actively managed (returns depend on the abilities of the manager)
  • Buy and sell as shares
  • Pooled with other investors
  • Tracks an index
  • Transparent pricing
  • Can’t outperform the index

 

  • Buy from a fund manager
  • Typically, personally tailored to your needs
  • Not pooled
  • Requires a larger initial investment

What diversified investment option suits best?

Except for some exotic options, the choice on whether to invest in a managed fund, managed account or an ETF 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 does often require 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?

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