Managed funds offer a cost-effective way to invest in a diverse number of companies and asset types (i.e. bonds, shares and term deposits). Platforms like Sharesies and InvestNow let you invest in a managed fund with as little as 1 cent and $50 respectively. These platforms let you make regular contributions (for example, $50 a week) so you can invest in managed funds as a saving strategy. An attractive feature of managed funds is that you don’t have all of your money in one, two or three companies.

​Most managed funds offered in New Zealand hold at least 50 securities so are relatively lower risk. It would also be near-impossible to invest in as many companies as a typical managed fund does, so there are huge efficiencies by investing in a fund that suits your needs.

If you invest in an actively managed fund, your money is looked after by a professional portfolio manager. Their reputation depends on the performance of the fund, so they are incentivised to outperform what someone could earn from an index fund. Investing in an actively managed fund means your money is looked after by analysts who bring expertise and technology resources to research the best companies to invest in. Their job is to analyse hundreds of companies and make decisions on what to buy and sell.

If you don’t have time or don’t want to read about companies listed on the NZX or overseas, having a portfolio manager to oversee your investments can potentially be invaluable.

Warning: One fund manager is not like another. While the vast majority follow a robust investment process, there have been cases in New Zealand where fund managers have failed their investors. Recent examples include Penrich Capital Limited and Ross Asset Management (revealed to be a PONZI investment scam). It's important to keep in mind that just because a managed funds company has a nice website and talks about its experience doesn't mean it's investing in your best interests. Always do your due diligence before making any investment. 

​If your fund receives dividends and/or interest payments from the assets it invests in, the fund manager will pay the tax due on your behalf. You will need to give the fund manager your prescribed investor rate (PIR) to make sure you’re taxed at the correct rate. The net proceeds are, as explained above, added to your fund to help your savings grow.

You can find a fund that will charge as little as 0.10% p.a. (Simplicity’s index-following NZ Shares Investment fund), or you can pay more than 1.50% for something that aims to outperform the markets (such as a Fisher Funds or Milford Asset Management fund). How much you pay is really driven by the costs of running the fund. Any index fund, which doesn’t need to hire analysts or investment managers (as there’s nothing to analyse or manage) will be much cheaper than a fund that needs a big investment team. We discuss the pros and cons of index funds in a dedicated guide.

Important: When evaluating a fund, keep in mind that the fees you’ll pay do impact how the fund will perform over time. For example, a managed fund with a gross return of 5% p.a. and a 1.50% p.a. management fee underperforms a fund with a gross return of 4% and a 0.25% p.a. management fee. When looking at managed funds, make sure you find out the recent returns after fees to make sure you are comparing apples with apples.

Buying into a fund is not a guaranteed path to riches. Funds can go down in value just as much as they can go up. In 2008, a number of New Zealand managed funds crashed in value as the investments included toxic CDO and MBS assets, which were part of the subprime mortgage scandal. Once a portfolio manager decides to invest in a particular asset, you are locked in until they sell it.

For these reasons, it’s essential to look at the track record and reputation of the managed funds company before making any investment decision. As you may expect, a trusted fund manager will have more funds under management than a new company which hasn’t proven itself.

MoneyHub Chief of Research Christopher Walsh shares his experience about when things can go wrong:
"When I worked an investment bank, we bought a lot of really toxic assets from managed funds. Our strategy was to buy distressed securities for next to nothing and wait for market conditions to improve. In many cases, we would pay 5 cents in the dollar for investments fund managers had paid full price for. What is meant is that the original investors lost 95% of their investment when their fund manager sold the assets to us. This is why it's critically important to understand what and who you are investing your money with".

Many New Zealand fund managers offer Portfolio investment entity (PIE) funds. A PIE fund is a managed fund that enjoys special tax rules. It behaves just like any other managed fund, but the tax you'll pay on the dividends are lower for higher-income earners. Not all managed funds are PIE funds, so check before you sign up if you earn an income above $70,000 a year as the tax savings can add up; if you normally pay tax at 33%, you will only pay 28% on your income from a PIE fund. Our guide What's My PIR Tax Rate? explains further. ​

There are hundreds of different managed funds on offer in New Zealand. Generally, they will be classified as “conservative”, “balanced”, “growth” or “aggressive”. A conservative fund will likely invest in assets like bonds and term deposits, whereas an aggressive fund will invest in high-growth assets like shares. Beyond the asset classification, managed funds may target a specific sector, like energy, infrastructure or financial services. Funds can also choose to invest in New Zealand, in established markets like the USA or Australia, or emerging markets.

As with any investment, by depositing money into a managed fund, you potentially risk losing 100% of your investment. While the risk of a total loss is improbable for most funds, in order to minimise risk there are significant benefits in doing due diligence on the fund manager, diversifying and investing for the long term.

Every KiwiSaver fund is, by definition, a managed fund. One significant benefit of KiwiSaver is that your employer contributes 3% of your wages or salary to your managed fund, and the government also makes an annual contribution to help you build up your investment.

KiwiSaver isn't complicated, but if you have been thinking about switching funds, our how to how to choose a KiwiSaver fund guide and favourite KiwiSaver funds guide has some ideas to help you make an informed decision. You can also contribute more than the standard employee 3% to boost your savings. Check our PAYE calculator to see how different KiwiSaver contribution rates make a difference to your after-tax income.

When investments go wrong, the investors who don't understand what they invested in are often the ones who lose out. You can't take anything on face value - David Ross fooled everyone who invested is his Ross Asset Management company, and many of his investors were smart and experienced people. Such cases are relatively rare, but you can never be too careful with your hard-earned money.

Are you looking for top-performing managed funds? Our Top Performing Managed Funds guide has you covered.