Not everyone has the time and resources to build a diverse investment portfolio and keep a close eye on it. That's where managed funds come in.

Managed funds allow you to pool your money with other investors so you can all invest in assets that might otherwise be out of your reach.

On your own, you might have sufficient funds to make a worthwhile investment in one or two stocks; together with other investors in a managed fund, you'll gain exposure to a whole range of assets. And professional fund managers will manage these investments for you.

There are various types of managed fund. Some focus on one particular asset class, such as property. Others invest in a combination of assets - across shares, property, bonds and cash.

When you buy into a managed fund you buy 'units' of equal value in the fund. If the value of the assets owned by the fund rises, then so too does the value of your units. If the value of the investments falls, then so too does the value of your units.

In addition, profits from the sale of fund assets, such as shares, and income generated by assets are passed on to unit holders in the form of 'distributions'. These distributions are in some ways the equivalent of receiving dividends on shares.

The attraction of managed funds is diversification (see Building Wealth). If you want to invest in shares but only have $1000, you'll really only be able to invest in one company - leaving you overly exposed to the fortunes of that business.

But invest that money in a share fund and you'll gain an interest in 10, 20 or even 50 Australian or international companies.

The same applies to property trusts. You might want to include real estate in your portfolio but can't afford to buy an investment property yourself. Instead, you could invest in a property trust, gaining exposure to shopping centres, city office blocks, warehouses or hotels, depending on the fund's focus.

Investing in a managed fund also gives you access to the expertise of professional fund managers, who should have better research and deeper knowledge of the markets in which they specialise. Apart from anything, they work full-time in investing, while you may not be able to devote much time to a portfolio.

Of course, you won't have complete control over where your money is invested - those decisions are made by the fund manager. But with thousands of managed funds to choose from, you should be able to find one that reflects your risk profile and closely mirrors the choices you might have made yourself.

In addition to their other benefits, many managed funds also offer the convenience of savings plans, which can be a way of easing yourself into the market with limited resources.

After investing an initial lump sum - as low as $1000 in some cases - a savings plan allows you to contribute a set, smaller amount each month (say, $100).

This also gives you the benefit of 'dollar cost averaging'. In the months when the unit price is low, you'll get more units for your $100; in the months when the unit price is high, you'll buy fewer (though you'll enjoy the capital gain).

In theory, if you average out what you paid for your units across the year, the fluctuations should largely be ironed out.

Tip:
Managed funds are also sometimes called unit trusts, in reference to the legal structure used by managed funds. Another term you'll come across is 'managed investment'. That's a broader term, also covering investments such as solicitors' mortgages.

Checklist:
Should you use managed funds instead of directly investing in shares? Ask yourself:

  • Can I afford to buy about a dozen individual stocks?
  • Do I have the time to monitor a portfolio?
  • Do I have ready access to information and research?
  • Am I unemotional about investment decisions?
  • Am I comfortable with the fees I will pay a manager?
  • Am I confident in their skills and independence?