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Unlisted managed funds vs mFunds: What’s the difference?

Managed funds​ are the go-to option for many investors, especially those who lack the time or confidence to buy and sell shares themselves. The appeal is pretty straightforward: you’re putting your money in the hands of a professional money manager and immediately gaining a diverse portfolio of stocks and other investments. These have traditionally been unlisted investments, though changes in technology and the market has led to the emergence of listed managed funds (mFunds​) more recently. 

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How do managed funds work?

A managed fund is a pool of money that is invested across a range of assets, potentially including shares​, government bonds, property and infrastructure. These are handled by professional fund managers who make investment decisions, including the buying and selling of assets, on behalf of the fund and its investors. If you invest in a managed fund your money is pooled with other investors' capital to increase the investment potential of the fund.

Most managed funds include hundreds – and sometimes even thousands – of assets invested in a diverse range of areas, across domestic and international markets. As managed funds are usually so diverse, they are generally seen as fairly low-risk investment options - though there are plenty of options for investors who are happy to take on higher levels of risk in search of greater returns, including geared​ funds and funds that focus on a particular sector or asset class.

But perhaps the biggest selling point for many investors towards managed funds is that they provide access to a diverse portfolio of assets with minimal effort. Creating the type of portfolio contained in a managed fund requires a lot of time and effort in terms of research and monitoring the market - something a lot of investors would be unable to match.

A downside of professionally managed funds is the cost involved - it’s not uncommon for funds to charge management fees of around 1-2% (and sometimes more) of the cost of your investment. That acts as an anchor on performance and makes it harder for your investments to achieve market-beating returns. There may be other costs too, including contribution and withdrawal fees and adviser fees. On the other hand, an investor in a managed fund will save on the transaction fees associated with buying and selling each asset, which can add up over time. 

Different types of managed funds

There are two types of funds – listed and unlisted. To buy into an unlisted fund, an investor will purchase units in a trust from the fund manager.

Listed funds include the highly popular exchange-traded funds (ETFs). These are bought and sold like shares on the stock exchange. Most of these funds are not actively managed and simply track an index or sector, which reduces costs but removes the potential for the fund to outperform.

In the past decade, however, the gulf between listed and unlisted funds has narrowed somewhat. There are now a small number of actively managed ETFs in Australia, while the ASX has introduced a settlement service to allow some managed funds, called mFunds, to be bought and sold via your online broker, making the process similar to that of purchasing and offloading shares. 

Unlisted vs listed funds: which is best?

While listed and unlisted funds have many of the same benefits, including portfolio diversification with minimal effort, there are a few key points that separate them.

Unlisted funds: pros and cons

Unlisted managed funds are actually the most common type of managed fund in Australia with more than 2,000 in operation. Those hoping to invest in funds will have a lot more options when considering unlisted funds. Perhaps most importantly, unlisted funds can also give investors exposure to unlisted assets that might otherwise be outside their reach, like infrastructure projects, micro-stock and emerging markets. This makes them a popular option for investors looking to diversify beyond stocks.

However, the downside to unlisted funds is the process of investing and withdrawing from one can be time consuming, potentially taking weeks for an investor to get their money in or out of a fund. The performance of these funds is also more difficult to monitor on a day-to-day basis, though investors will be able to compare annual and long-term performance against benchmark indices and rival funds.

Listed funds: pros and cons

A key benefit of listed funds is that they are transparent – you can track their performance on any given day via your broker. The process of buying and selling shares or units is also much more straightforward. In the case of ETFs​, costs will also be lower.

One possible downside to most ETFs, depending on your perspective, is that because they simply track an index or sector, there is no chance of market-beating returns. Then again, there is less chance of significantly below-market returns either (depending on the fees being charged).

mFunds, meanwhile, offer a similar dynamic to unlisted managed funds. They are actively managed, charge higher fees than ETFs or index funds, and may outperform or underperform the market. But are much easier to buy into or sell out of and to monitor on a day-to-day basis.

Final word: do your research

Whether you are looking at investing in listed or unlisted funds, the key is to do your research. Look at how a fund has performed over time (one year, three years, five years, ten years) and compare it to rivals and the benchmark.

Consider also the individual fund managers involved and their track records. Look at a fund’s focus or expertise – does it specialise in Asian equities? Or tech stocks? Does it engage in short-selling? Does it offer exposure to bonds or property? – and consider whether they are right for you.

FAQS

What is unlisted managed fund?

There are two types of managed funds – listed (mFunds) and unlisted. Managed funds have traditionally been unlisted investments, though changes in technology and the market have led to the emergence of mFunds​. Listed funds include the highly popular exchange-traded funds (ETFs)

What is ASX mFunds?

An mFund product is an unlisted managed fund admitted for settlement under the ASX Operating Rules and available to investors through the mFund Settlement Service. By investing in mFunds directly through CMC Markets Stockbroking’s standard platform, you have the opportunity to increase your diversification, by accessing and administering a range of asset classes – without the paperwork burden usually required to invest in managed funds.

What are listed managed funds?

There are two types of managed funds – listed (mFunds) and unlisted. Managed funds have traditionally been unlisted investments, though changes in technology and the market have led to the emergence of mFunds​. In Australia, the ASX has introduced a settlement service to allow some managed funds, called mFunds, to be bought and sold via your online broker, making the process similar to that of purchasing and offloading shares.

How do I invest in mFunds?

In Australia, the ASX has introduced a settlement service to allow some listed managed funds (those known as mFunds) to be bought and sold via your online broker, making the process similar to that of purchasing and offloading shares. By investing in mFunds directly through CMC Markets Stockbroking’s standard platform, you have the opportunity to increase your diversification, by accessing and administering a range of asset classes – without the paperwork burden usually required to invest in managed funds.

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