Managed funds are operated by a responsible entity which assumes both the role of manager and trustee of the fund. The Corporations Act 2001 (Cth) provides strict guidelines for the operation of such funds and the conduct of the responsible entity.
The responsible entity has to set up strict systems to protect investors’ interests and help prevent breaches of the law. Regulation of managed funds is controlled by the Australian Securities & Investments Commission (ASIC).
Managed funds incur ongoing administration costs which are paid out of the fund. All trusts incur fees and charges for management as outlined in the product disclosure statement or prospectus. These are payable each year on the full value of your investment and are deducted before income is paid. In times of low returns, management fees may considerably reduce your income.
Taxation of managed investments—tax implications of these kinds of investments can be complex. There may be tax advantages with some income payments received and you should check with a qualified tax consultant to make sure you understand the implications for your overall retirement income plan.
Unit trusts
A unit trust is an investment fund that combines money from many investors to make one large pool of money. This money is then used to buy a wide range of assets.
Investing in a unit trust gives you access to investments you may not be able to afford on your own, such as shopping malls, large commercial properties or diversified share portfolios.
When you invest money in a unit trust you buy a number of units. Each unit is an equal share in the investments held by the trust. The unit price, which represents the value of each unit, is determined by the value of the investments held by the trust. The unit price can increase or decrease depending on the movements in the markets in which the investments are held—for example, the share market or the property market. The unit price of trusts with overseas investments is also affected by the changing value of foreign currencies.
How unit trusts work
Duration: Generally medium to long-term investments.
Returns: Vary greatly and losses are possible. You only make a loss when selling your units for a lower price than you paid to buy them. Other losses are only paper losses.
Minimum investment: Usually a minimum of $1 000 to $5 000. Regular additional deposits are allowed.
Investment decisions: Made for you by investment professionals.
Capital growth/loss: Is reflected by a change in the unit price.
Interest: Can be paid to you, or reinvested to buy extra units. The frequency of your interest payments depends on the type of trust you choose. Generally, interest is paid quarterly, six-monthly or yearly. These details are in the prospectus or product disclosure statement.
If you decide to draw a fixed income from a unit trust, you may draw down your principal as well as your interest. This happens if earnings are lower during a particular period than the income you draw. Over time this can erode the value of your investment. However, it might be appropriate to draw down your capital.
Types of unit trusts
Unit trusts differ according to the types of investments the trust buys. This may be indicated by the name of the trust—for example, a bond trust or property trust. Some trusts may have a mixture of investment types and are often called balanced trusts or managed trusts.
There are many types of unit trusts, including:
- bond trusts
- cash management trusts
- equity trusts
- mortgage trusts
- property trusts.
All unit trusts must give potential investors a copy of their product disclosure statement or prospectus. It must tell you everything you or your adviser need to decide whether to invest—for example, the types of assets a fund manager can buy, whether the fund can provide income, capital growth, or a combination of both.
[ top ]
Bond trusts
Bond trusts allow you to invest in a range of government, semi-government and company bonds.
Bond trusts actively trade bonds on a specialised market to achieve a higher return than the interest that is paid on the bonds.
Government and semi-government bonds are easily traded, but this may not be true for all company bonds. A bond trust holding a high percentage of company bonds may be a higher risk than one that holds more government bonds.
Some trusts invest in overseas bonds and currencies. These have the added risks of changes in overseas interest rates and changes in the value of overseas currencies against the Australian dollar.
How bond trusts work
Returns: Can be reinvested, paid into your financial institution account, or paid to you by cheque. Income may vary with each payment. Bond trusts are affected by changing interest rates and are not risk-free investments. When interest rates are rising, bond trusts may perform below expectations. This may result in a fall in unit price or a very poor level of earnings.
Minimum investment: May apply to your initial deposit as well as to additional deposits.
Withdrawals: You can make withdrawals at any time, but usually a minimum amount applies.
Capital growth: Bond trusts generally provide little capital growth.
Cash management trusts
Cash management trusts allow you to invest in the short-term money market, with easy access to your money while earning a competitive short-term interest rate.
Don’t confuse cash management trusts with cash management accounts offered by banks, building societies and credit unions. Some cash management trusts offered by banks’ subsidiary companies may use a similar logo and name as their cash management account. They are not the same investment. They have different levels of risk, offer different interest rates and have different conditions.
Cash management trusts have a credit rating to indicate the risk factor. Cash management trusts that invest only in government or bank-backed investments are low risk. The security and access to money invested in cash management trusts is outlined in the prospectus or product disclosure statement.
How do cash management trusts work?
Duration: Short-term investment.
Access to your funds: Usually available the same day or within 24 hours by direct deposit, telephone or mail withdrawals. Income from other investments, including pension payments and dividends, may be credited direct to your cash management trust. Cash transactions are not usually permitted. Deposits must be by cheque and withdrawals are paid by cheque or to nominated accounts. Branch counter access is very limited.
Fees: The fees and how they are charged are set out in the prospectus or product disclosure statement.
Interest: May be higher than other investments with at call or 24-hour withdrawal facilities. Interest is usually calculated daily and paid quarterly. Interest rates on your cash management trust will rise and fall with cash and fixed interest market changes.
Minimum investment: The initial deposit required is usually $5 000. A specified minimum balance may be required to keep the investment open.
Capital growth: There is no capital growth on your money
[ top ]
Equity trusts
Equity trusts allow you to invest in a wide range of shares listed on a stock exchange. They usually provide a medium level of income with potential for longer term growth.
Some equity trusts aim to produce more income than capital growth while others may aim for more growth. This will be outlined in the product disclosure statement or prospectus. Be sure that the aims match your needs.
How do equity trusts work?
Duration: Medium to long-term.
Minimum investment: Varies between funds but starts at $1 000 or from $100 if regular automatic contributions are made from a bank, building society or credit union account. Additional units may be purchased in the trust. With only a small investment, you have the opportunity to invest in a range of companies and/or share markets.
Access to your funds: Your money is usually available within one week, but can take up to three months in certain circumstances. You have no direct say in which shares are bought.
Income: Usually paid six-monthly. Can be re-invested or paid to you.
Capital growth: Equity trusts are not risk-free investments. If there is a potential for capital growth, there is also a potential for capital loss.
Capital growth: Equity trusts are not risk-free investments. If there is a potential for capital growth, there is also a potential for capital loss.
Listed investment companies
Listed investment companies can offer the same type of investments as equity trusts. Rather than buy units in a trust you buy shares in the listed investment company (LIC).
Mortgage trusts
Mortgage trusts lend to individuals and companies who buy or develop residential or commercial properties.
Mortgage trust loans are secured by mortgages over real estate. The trust collects the interest paid on these loans and distributes the interest as income to the investors. The security of your capital could be affected if small margins are held and the value of the real estate falls.
Mortgage trusts should not be confused with property trusts. Mortgage trusts lend against the security of a mortgage while property trusts buy or develop property on behalf of unit holders.
How do mortgage trusts work?
Duration: Three years minimum term.
Returns: Varies as interest rates on loans change. Loans held by the trust have fixed interest rates, so earnings do not change until loans mature. This delays the changes in return that you receive, and changes may not be by the same percentage as the loan rates changes.
Interest: May be re-invested, paid into your account or paid to you by cheque.
Minimum investment: Usually a minimum of $1 000. Additional deposits may be made.
Capital growth/loss: Mortgage trusts do not provide capital growth. The outstanding amount owed on a loan to the trust may be more than the value of the mortgaged property. If the property is sold to recover the debt, the trust may suffer a loss. If the trust has lent a large amount to one borrower and they cannot repay, the trust may suffer a significant loss. Most mortgage trusts can borrow extra funds. A high level of borrowing increases risk. Also, the institutions lending the money to the trust may have a better claim over the mortgaged property than the trust itself.
Access to your funds: The withdrawal time varies between trusts and may range from a few days to six months. Most mortgage trusts charge an exit fee for withdrawals during the first 3 years. Mortgages are not easily sold to other institutions. If the trust receives many withdrawal requests and holds insufficient cash in reserves, it may be difficult to raise the required cash. This may result in losses or long delays in payment.
[ top ]
Property trusts
Property trusts allow you to invest in the property market, with potential for income and growth.
How do property trusts work?
Duration: Medium to long-term.
Returns: Income payments may be re-invested, credited to your account, or paid to you by cheque. The distributed income may have tax advantages.
Access to your funds: Withdrawals from unlisted property trusts may sometimes be difficult.
Capital growth/loss: There is potential for capital growth. Property trusts are not capital guaranteed, so their value changes with market variations and can increase or decrease in value. Some property trusts borrow funds to invest. A high borrowing (or gearing) level increases the possible amount of capital gain or capital loss.
Minimum investment: Usually from $1 000 to $5 000.
There are several types of property trusts including:
Listed property trusts directly own and manage large properties usually in the office, shopping centre, industrial or leisure sectors of the property markets. The units in the trusts are listed on the stock exchange and are bought and sold through a stockbroker. The value of the units rises and falls on a daily basis in response to supply and demand in the market. Prospectuses are usually only required when new units are issued to small retail investors by way of a new float or a rights issue. Investors considering buying existing units on the stock exchange can get detailed information on a particular trust by acquiring a copy of its last annual report.
Unlisted property trusts directly own and manage real estate. They are not listed on the stock exchange. These trusts are now rare, because many have become listed property trusts.
Property securities trusts are unlisted. Your money is invested in listed property-related securities, such as shares and trust units. They offer potential for income and growth. The unit price of the trust is linked to share market changes, but units are bought and sold directly through the trust manager, not a stockbroker.
The security of a property trust investment depends on the type of trust, the properties it holds and its investment policy. Property securities trusts and unlisted property trusts should provide details in their product disclosure statement or prospectus.
Personal investment funds or master trusts/wrap accounts
Master trusts and wrap accounts are managed investment schemes where the investor has the sole responsibility for all the investment decisions. They provide a service for acquiring and retaining investments where an investor can buy, hold and sell investments within a single administration arrangement that provides consolidated means of reporting on the investments held. These can be complex investments and may not be appropriate for all investors. They cover both superannuation and non-superannuation investments, however the regulation governing their operation differs. Superannuation funds using a master trust structure are regulated under the Superannuation Industry (Supervision) Act 1993 (Cth). Non-superannuation master trusts are regulated under Corporation Law as managed investments.
A major difference between a master trust and a wrap account is that wrap accounts can include direct investments such as shares and property.
The principles of administering master trust and wrap accounts are similar for both superannuation and non-superannuation investments. Master trusts and wrap accounts are the terms used by industry to describe these services, however they are formally called investor directed portfolio services (IDPS) under Australian Securities & Investments Commission (ASIC) policy. IDPS generally offer a menu of pre-selected investments/investment managers that investors can choose from to invest their savings.
Fee structures related to these types of investments can be complicated and investment decisions complex so it is best to get professional advice from a qualified accountant or financial adviser.