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Managed Funds vs Direct Equities

You’re starting to think its time to purchase some investments and would like to know more around shares versus managed funds. They are the two most popular ways of holding investments in Australia, but now do  you decide which is the better option?

MANAGED FUNDS

Offers: Disadvantages:
  • Potentially greater diversification as you are buying a small piece of a unit trust that might own shares in many companies along with other investments.
  • There are no brokerage costs to purchase the units of a managed fund.
  • Wholesale investment analysts are managing the fund.
  • Management fees are generally a lot higher than brokerage costs.
  • The fund must be invested in a set percentage in the market even if it is not a good time to invest.
  • Generally less income paid to the investor as opposed to direct shares as any dividends are normally included in the unit price. This can be a problem at retirement as the most important aspect is the income that the investment generates.
  • Tax benefits such as franking credits may not always be full passed on to the investor.
  • There are no voting rights in regards to corporate actions such as share purchase plans, takeover options and hybrid security options.
  • There is generally less advice provided by the adviser as no work is required on their behalf in regards to the fund.

DIRECT EQUITIES

Offers: Disadvantages:
  • Direct ownership with no layers between the investment and the owner. This also provides greater transparency for the investor as they know what they are invested in and how much is invested in each company.
  • The portfolio can be tailored towards the investor’s specific needs to ensure there is allocation towards direct shares, cash, fixed interest, listed property and hybrid securities. An investor that is retired and solely dependent on income would have a different portfolio to an investor that is still in accumulation phase.
  • You are able to sell down a specific share instead of selling down the entire portfolio. This provides a great advantage especially when there is a capital gain and you can specifically target one investment to take the profit and keep the remaining portfolio unchanged.
  • The tax benefits are more transparent and can be more beneficial with franking credits on dividends.
  • Direct ownership allows voting rights in respect of corporate actions where you have choice to participate or decline.
  • Ongoing reviews and management is generally provided.
  • Diversification is generally less than what Managed Funds can provide.
  • There are brokerage costs per buy and/or sell.
  • You generally require an investment adviser to manage the investments unless you do it yourself.

 

Consider talking to your financial planner to help choose which is best for your personal circumstances and to monitor and advise you on these going forward so you are making the most of your investment.

Hayden White

Hayden has worked in the financial services for last 15 years and provides specific direct equity investment advice both for clients that require portfolios inside and outside superannuation.

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