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Is it time to move your savings from the bank to managed funds?

It’s no secret that interest rates have been dropping rapidly over the last few months and with the ongoing Covid-19 crisis, this trend is looking set to continue.

In fact, some economists are even predicting negative interest rates if the Official Cash Rate (OCR) is set to a negative figure.

Negative interest rates are generally good news for property owners who will rejoice in paying less interest on their mortgages. But for savers, the outlook is not so rosy. Negative interest rates work both ways and mean less reward interest for people with money in the bank.

This means that it may end up being little more use keeping your money stored in the bank than it is having it under the mattress.

If this is you, and you have savings in the bank, there are other options. At NZ Advice Group we believe in the philosophy of investing in a diverse way and in today’s blog we look at one way of doing that: professionally managed funds.

If you’re prepared to play the long game, these could be a good alternative option for investing your hard-earned cash.

What are Managed Funds?

Managed funds allow you to put your money into different investments across a diversified range of different businesses and assets.

One of the best and most popular things about managed funds is that you’re not putting all your eggs in one basket.

Instead, your money is added to a pool with other investors’ money and spread across a variety of investments. If one investment isn’t performing so well, chances are good that another one will make up the shortfall.

Ensuring that your funds are professionally managed is important as it means eyes on your investments at all times to get the best results.

How do I earn from my investment?

You can earn income through managed funds in two ways. The first is dividends where the funds make regular payments to you based on how much you have invested. A small investment naturally results in smaller dividends but as your investment grows, so too do the returns.

Just be aware that you will be taxed on any dividends you earn as this is considered income.

The second way of making money on managed funds is through capital gains when you sell the investments. If your investments are now worth more than what you originally paid for them, you get to keep the difference when you sell them, thus making a capital gain.

At present, New Zealand does not have a capital gains tax (although it has been proposed) so the way you are taxed on any capital gains you make is not black and white.

Essentially, if you purchase shares with the intention of selling them to make a profit and this is the main purpose of the purchase (as opposed to dividend income) then you will be liable to pay tax. Find out more here.

What kind of returns can I expect?

Managed funds are generally split into three different types: conservative, growth and aggressive.

Conservative funds focus on investing in lower risk companies and ventures. Your returns may not be as great, but you can have more confidence in a safe and steady investment.

An aggressive fund on the other hand is higher risk. Your money is placed into investments that may not be considered as steady and reliable but, if you wait out the ups and downs, the chances of higher returns are better.

A growth fund sits in the middle and features a mix of both conservative and aggressive investments.

If you’re a KiwiSaver member then you’re already investing in a managed fund. If you don’t already know, it would be worth checking if you are in a conservative, growth, or aggressive fund.

Often people who are closer to retirement opt for a conservative fund to keep their money as safe as possible ahead of needing to use it. Those who are further away from retirement and have plenty of time on their hands tend to be in aggressive or growth funds where they can ride out the waves for longer.

However, this is not always the best approach and it will depend on the retirement plan you have in place so have a chat to us about the best options.

What type of businesses will my money be invested into?

This is a great question and will depend a lot on which provider you go with as there are hundreds of different managed fund options available in New Zealand.

Often you can choose the types of investments you make based not only on anticipated returns but also on your own ethical considerations or personal interests. This allows you to design a broad and varied portfolio that is personalised to you. This is something to discuss with your financial advisor.

Is there anything more I need to know?

It’s important to be aware that investment options like managed funds are primarily for people who can be comfortable with not accessing their money for at least 5 years. It’s really a long-term investment approach. That’s because there is volatility in these funds due to the higher risk nature. The price you pay for riding out the volatility over the long term is greater returns.

If you know that you’re going to need to access your money in the short term and aren’t playing the long game, managed funds may not be the best approach so have a chat to us about the best options.

The other thing to be aware of is that some managed funds are actively managed whereas others are passive. A passive managed fund simply follows a market index and there is no management team making decisions.

An active managed fund on the other hand has a manager or team in place making decisions on how to invest the fund’s money. While there is no crystal ball to predict how a fund will perform, we believe that professionally managed funds give the best result and active management is often part of this. Again, it’s important to chat to your financial advisor about the best options.

Interested in finding out more about managed funds and other options to diversify your investments? Contact us to arrange an obligation-free appointment to discuss the best options for your situation. Call us on 0800 230 235 or send us an email to admin@nzadvicegroup.co.nz to set up a mutually convenient time.