As always when thinking about different investment vehicles to use for yourself, you need to fully understand what it is you are investing in. It is extremely important to understand the fundamentals of the vehicles you choose to invest in as it can make a huge difference to the end result of your chosen investment. Investing into the share market can often seem like a minefield for the regular investor, so understanding it and the range of investments within it is a must.
There are many ways to invest into the share market as well as different strategies. Buying shares is an obvious way to get into the market. However, may not necessarily be the right option depending on your current goals, knowledge of the company you’re investing in and current financial circumstances. For those who want to leave the stock picking to the experts managed funds can be a great way to get a diversified portfolio of investments through buying into a single fund.
Shares and managed funds however are often misunderstood and pooled together as the one investment choice. We don’t believe they do and that they are a very different for a few distinct reasons.
What is a share
Shares are individual units of ownership in a company or financial asset. Some people forget or don’t understand that once purchasing shares in a company you are a joint ‘shareholder’ and therefore owner in the company you have invested in. Shares come from the capital of the actual company itself which makes up the value of the companies worth.
How and why should you invest in shares
There are both positives and negatives to investing in shares. It can serve specific purposes depending on the goal and investment strategy you are trying to put in place.
Reasons you might want to consider buying shares to invest:
• Long term capital growth, especially if you are looking at blue chip shares with the correct valuations.
• Dividends, certain companies will pay out percentages of their post-tax profits. Some companies pay out more than others and this can be an incentive for income conscious investors
• Liquidity, unlike property or other long term larger investment shares are relatively liquid and you can sell out and realise your capital within a few days.
Investing in shares often brings with it an emotional connection to the company or companies you have invested in, which can be both a positive and negative. Lack of diversification can be a deterrent to holding individual shares.
What is a managed fund
A managed fund is an investment fund that holds a portfolio of shares that is run by a professional investment manager. The difference between the two is you actually buy in the managed fund and hold ‘units’ in the fund. This can mean a great deal of difference between holding an individual stock or a unit within a trust of pooled stocks.
How and why you should invest in managed funds
When buying into managed funds there are plenty of things to consider as it can be a minefield for investors and professionals alike. One of the major advantages of managed funds can be the significant brokerage cost savings as your funds are pooled together and shares are bought as a large parcel relative to all the investors in the fund. However, managed funds can also incur alternative costs to brokerage including administrative and fund manager fees. All of this needs to be considered when comparing similar products
If buying into a managed fund fits into your investment and risk v return mix these are some of the reasons you may consider buying into a managed fund:
• Diversification, by far the best thing about managed funds is gaining access to a diversified portfolio (like an index for example) without coping the brunt of brokerage fees and reducing your investment risk
• Long term capital growth, a well-chosen managed fund will satisfy long term wealth generation goals.
• Cost effective investment,
• Access to a range of investments, this coincides with diversification. However, there are so many different managed funds to choose from spread across a huge range of asset classes that it can be difficult to know which one to pick.
Knowing the difference between the two investment vehicles can mean a great deal of difference at the end of the day. Both shares and managed funds both have their pros and cons but serve different purposes depending on your end goal. With both investment vehicles, it is important to be fully aware of how and why you should be investing into the share market. Please contact us if you wish to learn more about the differences and what might suit you better.
McQueen Financial Group is a corporate authorised representative of Total Financial Solutions Limited. AFSL No. 224 954, ABN 94 003 771 579 This information is of a general nature only and does not consider your investment objectives, financial situation or particular needs. You should not act on any information in this report without first consulting a professional investment adviser in order to ascertain whether the information and any investment decision is appropriate. This information is believed to be accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained, and neither TFSA or its Representatives and officers, agents or employees of either of the aforementioned shall not be held liable for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence).