If you want to plan a brighter financial future, managed funds can be a key way to grow long-term wealth. Read on to find out more about investing in managed funds in New Zealand, and how to grow your wealth for the future.
What are managed funds?
When you research the topic of financial planning in New Zealand, managed funds are one of the key investments that are recommended. But what exactly are managed funds?
Managed funds are professionally run investment funds where your money is pooled with other investors. A portfolio manager then invests that pool across a mix of assets — like shares, bonds, and cash — depending on the fund’s strategy. You own ‘units’ in the fund, and the value of those units goes up or down based on how the fund’s investments perform.
Why choose a managed fund investment?
One of the main benefits of investing in a manged funds, is that rather than deciding on specific companies or equities to invest in yourself, an expert team of portfolio managers handles everything on your behalf. These experts actively research, analyse, diversify and execute different investments with the aim of getting the best possible returns for that fund type.
This makes managed funds a simple, easy and a relatively passive way to invest, because you do not need to manage anything, and the investment is already diversified. All you need to do is choose the managed fund that best suits your investment goals, timeframe and decide how much and how often to invest.
How managed funds work
When you invest in a managed fund in New Zealand, you purchase ‘units’ that represent a portion of the fund's total value. The unit price on any specific day indicates your share of the fund’s worth – how much your investment is currently worth.
Your investment is combined with those of other investors in the fund and managed by our team of professional fund managers who invest in both local and international markets.
The value of these units fluctuates depending on the performance of the financial assets within the fund. This value can go up or down. Your investment return is the difference in unit price when you first invest compared to when you withdraw.
How managed funds build wealth over the long term
There are two main ways managed funds can achieve long-term wealth building. The first is via returns, by virtue of the longer time frame.
Different fund types come with different levels of risk. At first glance, you might assume that higher risk is best avoided.
But, with a longer investment timeframe, a more aggressive fund has the highest potential for gains.
In a long-term investment, the ups and downs of the market are smoothed out over time, so risk is reduced. Think of a line on a graph trending upwards, but with significant peaks and valleys on the way. It’s not a smooth line, but the long-term trend goes steeply upwards.
History shows that in the long term, an aggressive fund has potential for higher returns than a more conservative fund. The conservative graph line would be smoother, with fewer ups and downs, but it doesn’t typically trend upwards at such a high rate.
This principle is illustrated in the graph below. (Note that this is a very general example of the concept, it does not depict actual returns of any fund.)
Simply put, if you’re in it for the long haul, you can generally afford to take on a little more risk. Choosing an aggressive fund is one reason why managed funds are a good option to build for long-term wealth.
The second way that managed fund build long-term wealth is via the power of compounding returns.
With compounding returns, your principal (the money you invest) earns returns, and these returns are reinvested. Over time, you earn returns on the returns, as well as on the principal. The more time your money is invested, the more potential you have to earn compounding returns.
Small contributions may not seem like much at first, but over time, they can make a significant difference, especially if you consistently invest money in your managed fund.
This is a great example of passive income – you don’t need to do anything; your money (and the passage of time) is doing the work for you.
Are managed funds a low-risk investment option?
All investments come with some degree of risk. Past performance does not guarantee future returns, which can be positive or negative.
Managed fund returns go up and down with the market — and the market is influenced by things like interest rates, company performance, global events, and investor confidence. These ups and downs are normal and expected, especially in the short term. However, with skilled portfolio managers, you can be reassured that they are actively managing the fund and investing time and skill towards getting the best results. (This is not the case with passive fund managers, who simply follow an index.)
At Generate we’re rightly proud of our expert investment team and their consistently strong long-term results – you can see more about them here.
A few other things can help mitigate the risks of investing in a managed fund.
For one thing, in New Zealand, managed funds operate under financial regulations and compliance standards, ensuring that investors' money is handled responsibly. They are governed by financial market laws that help protect investors and maintain transparency - The Financial Markets Conduct Act 2013 (FMC Act) and the Financial Markets Conduct Regulations 2014.
Additionally, all funds invested through Generate are held by an independent custodian (Public Trust) to ensure the security of your funds.
While every investment involves a degree of risk, managed funds are more of a known quantity, especially when you compare them to less regulated markets such as crypto or to ‘get rich quick’ schemes that seem too good to be true.
Introducing Generate’s Managed Funds
Many of our savvy KiwiSaver members have been keen to grow their long-term wealth even more, and know that one of the best ways to do this is with a managed fund. That’s why we now offer a wide choice of several Generate Managed Funds to suit various investment time frames and risk profiles.
Our current fund options include our Generate Thematic Managed Fund, Australasian Managed Fund, Global Managed Fund, Focused Growth Managed Fund, Balanced Managed Fund, Conservative Managed Fund, Fixed Interest Managed Fund and CashPlus Managed Fund.
You can explore our full selection of Generate Managed Funds here.
You only need a small amount to get started, and from there our team of expert fund managers will actively manage your investment, making all the tough decisions about when and what to invest in.
Read more about managed funds:
How to start investing in Generate Managed Funds
If you want expert advice choosing the right managed fund for you, you can book a chat with one our friendly advisers. If you’ve already made up your mind, you can apply below or within our handy Generate app.