Investing can take many forms, but two of the most common approaches are buying shares directly or investing through a managed fund. Both can provide exposure to investment markets, yet they differ in how they are owned, selected and managed.
Understanding these differences can help investors feel more informed when discussing their options with a Financial Adviser.
What Is Direct Share Ownership?
Direct share ownership means purchasing shares in an individual company listed on a stock exchange, such as the Australian Securities Exchange.
When you buy shares directly, you become a part-owner of that company. The value of your investment may rise or fall depending on factors such as the company’s financial performance, investor confidence, economic conditions and broader market movements.
Some companies may also pay dividends, which are distributions of company profits to shareholders. Dividends are not guaranteed and can be increased, reduced or stopped depending on the company’s circumstances.
A direct shareholder generally chooses which companies to invest in, how much to invest and when to buy or sell.
This approach provides a high level of control and transparency. Investors can see exactly which companies they own and monitor the performance of each investment.
However, direct share ownership also places responsibility on the investor to research companies, review announcements and understand the risks associated with holding individual shares.
What Is a Managed Fund?
A managed fund pools money from many investors. A professional fund manager then invests that money according to the fund’s stated strategy.
Depending on the fund, investments may include Australian shares, international shares, property, fixed interest, infrastructure, cash or a combination of different asset classes.
Instead of owning each underlying investment directly, the investor usually owns units in the managed fund. The value of those units changes as the value of the fund’s underlying investments moves.
Managed funds can provide access to a broad range of investments through a single investment. They may also allow investors to access markets or asset classes that could be difficult to research or purchase individually.
The investment decisions are generally made by the fund manager rather than the individual investor. This can be helpful for people who do not have the time, confidence or interest to select and monitor individual companies.
Diversification and Risk
One of the major differences between direct shares and managed funds is diversification.
An investor who owns shares in only one or two companies may be heavily affected if one of those businesses performs poorly. Building a diversified direct share portfolio usually requires investing across multiple companies, sectors and possibly countries.
A managed fund may hold dozens or even hundreds of investments. This can spread risk across a wider range of assets, although diversification does not remove the possibility of investment losses.
The amount of diversification provided will depend on the fund’s strategy. Some funds may be broadly diversified, while others may focus on a particular industry, country or investment theme.
Costs and Fees
Direct share investors commonly pay brokerage fees when buying or selling shares. There may also be costs associated with investment research, administration or professional advice.
Managed funds generally charge management fees to cover the operation of the fund and the expertise of the investment manager. Some funds may also charge performance fees, transaction costs or other administration expenses.
Fees vary considerably, so it is important to review the relevant disclosure documents and understand the total cost of an investment.
Control and Decision-Making
Direct share ownership provides greater control over individual investment decisions. Investors decide exactly what they own and when changes are made.
Managed fund investors hand most day-to-day investment decisions to a professional manager. While investors can choose which fund to enter or leave, they generally cannot select the individual investments held within the fund.
Neither approach is automatically better than the other. Some people prefer the control of direct shares, while others value the diversification and professional management offered by managed funds. Some investors may also use a combination of both.
Seek financial advice to explore how these investment approaches apply to your unique situation.
If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.
This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.
(Feedsy Exclusive)
