The Pros and Cons of Managed Funds

Managed funds remain one of the most accessible ways for Australians to build wealth. They pool money from investors and are run by professional managers who buy and sell assets like shares, bonds, property securities and cash. If you prefer a hands‑off approach, want broad diversification without assembling dozens of investments yourself, or would like the discipline of a formal investment process, managed funds can be a practical core holding. This guide walks through the real‑world advantages and trade‑offs, fee types, taxes, performance traps, and how managed funds compare with ETFs and other structures.

If you want tailored help building a portfolio, you can book a quick discovery call or learn more about our Financial Planning & Investment Advice.

What is a managed fund?

A managed fund (also called a managed investment scheme or unit trust) pools your money with other investors. You buy ‘units’ in the fund; the value of each unit moves with the fund’s assets. The manager follows a stated strategy—e.g., Australian shares, global shares, balanced, fixed income—and publishes a Product Disclosure Statement (PDS) that outlines risks, fees, and how the fund operates.

For a plain‑English overview of how these schemes work, see Moneysmart – Managed funds.

Pros of managed funds

1) Diversification from day one

With a few hundred or thousand dollars you can access hundreds of securities across sectors and countries. That instantly reduces single‑company risk compared with buying a small number of direct shares.

2) Professional management and research

Managers run disciplined processes: security selection, risk controls, rebalancing, and corporate actions. For investors without the time, tools, or inclination, outsourcing this workload is valuable.

3) Access to asset classes and strategies

Many strategies are difficult to replicate personally (e.g., global small caps, active fixed income, credit, or certain property and infrastructure exposures).

4) Simplicity of administration

Unit pricing, income distributions, and annual tax statements are handled by the fund. Platform‑based funds can consolidate reporting across your portfolio.

5) Regular savings and reinvestment

Most funds support automated contributions and distribution reinvestment, which helps dollar‑cost averaging and compounding.

Cons (and how to manage them)

1) Fees and costs

You’ll typically pay a management fee, possibly a performance fee, and buy/sell spreads. Some funds also have administration or platform fees. Compare the ‘management cost’ (MER/ICR) in the PDS and consider net‑of‑fee performance over full cycles.

2) Tax ‘leakage’ and distributed gains

Because managed funds are trusts that pass through income, you may receive taxable distributions each year—even if you didn’t sell units. These distributions can include interest, dividends (with franking credits), foreign income, and capital gains. In strong markets or after portfolio turnover, capital gains distributions can lift your tax bill.

Read more about how trust distributions are taxed at the ATO and how the AMIT regime works for managed funds.

3) Less intraday liquidity than ETFs

Most unlisted managed funds price and process applications/redemptions daily, not minute‑by‑minute. That’s fine for long‑term investors, but traders may prefer exchange‑traded options.

4) Manager risk

Active funds can underperform benchmarks after fees. Even good managers have style cycles where they lag. Diversify across strategies and don’t chase short‑term performance.

5) Minimums and timing

Some funds require higher minimum investments or have cut‑off times for orders. Check each fund’s PDS before investing.

How managed funds pay you (income, franking, and capital gains)

Managed funds typically make quarterly, semi‑annual or annual distributions. These can include:

• Interest and other income (assessable at your marginal tax rate).
• Dividends with attached franking credits from Australian shares (subject to holding period and other eligibility rules).
• Net capital gains (may be eligible for the 50% CGT discount if the fund held assets >12 months and you’re an individual or trust).
• Foreign income (may come with foreign income tax offsets).

Background reading: ATO – Guide to capital gains tax (individuals & trusts) • ATO – Franking credits and franking tax offset • Moneysmart – Franked dividends

For a deeper dive into portfolio design with franking, see our post The Role of Franking Credits in Investment Planning.

Fees explained (and how to compare apples with apples)

• Management fee: annual percentage charged by the manager.
• Performance fee: charged when the fund outperforms a benchmark or hurdle (check the high‑water mark rules).
• Indirect cost ratio (ICR) / MER: captures ongoing costs in running the fund—use this for headline comparisons.
• Buy/sell spread: entry/exit cost that compensates remaining investors for transaction costs when money moves in/out.
• Platform/admin fee: if you hold funds via an investment platform or wrap, compare total portfolio cost.

Always read the fund’s Product Disclosure Statement (PDS) to understand fees, risks and liquidity.

Active vs passive, and how managed funds compare with ETFs and LICs

Managed funds come in both active and index (passive) flavours. Passive funds aim to track a benchmark at low cost; active funds seek to outperform after fees. On the ASX, you can also access diversified exposures via Exchange‑Traded Funds (ETFs) and Listed Investment Companies (LICs).

• Unlisted managed funds: priced once per day; buy/sell via application and redemption at NAV (plus spreads).
• ETFs: trade on‑exchange throughout the day at market prices; often very low cost for broad indices.
• LICs: closed‑end companies that can trade at premiums or discounts to the value of their portfolios.

See Moneysmart – ETFs for an overview of ETF mechanics.

How platforms and managed accounts fit in

Many investors hold funds via investment platforms (wraps) for consolidated reporting, corporate actions handling, and access to a menu of managers. A step beyond pooled funds is a Managed Account—also called an SMA/IMA/MDA—where your underlying holdings are visible in your name and a portfolio manager implements changes for you under a model. Managed accounts improve tax transparency and timing control but may have different fee structures.

If you’re weighing up pooled funds vs managed accounts, our 6‑Step Financial Advice Process explains how we help clients choose the right implementation for their goals.

How to choose a managed fund (practical checklist)

• Objective & role: What job does this fund do in your total portfolio (growth, income, ballast)?
• Mandate clarity: Asset class, region, style (value/growth/quality), and risk constraints.
• Track record across cycles: Focus on rolling 5–10 year results, not one hot year.
• Team & process: Is performance linked to a repeatable process or a single star manager?
• Capacity & liquidity: Small‑cap or credit funds can be sensitive to size and market liquidity.
• Fees vs value‑add: Judge active managers on net‑of‑fee alpha over full cycles.
• Tax efficiency: Turnover creates taxable distributions; prefer sensible turnover and after‑tax awareness.
• Risk metrics: Volatility, drawdowns, sector/stock concentration—do these fit your tolerance?
• Implementation: Minimums, buy/sell spreads, cut‑off times, and platform availability.

For a broad orientation, compare any shortlists against Moneysmart’s managed funds guidance.

Tax in detail: distributions, CGT discount and record‑keeping

Managed funds distribute taxable income annually. Your tax statement (which may be AMIT‑style) breaks down categories so you can declare them correctly. If you hold units for more than 12 months, you may be eligible for the CGT discount on capital gains realised when you sell your units.

Useful ATO materials: Trust distributions and tax statements (AMIT) overview • Capital gains tax guide • Foreign income tax offsets

If you invest for income from Australian shares, you’ll also want to understand franking credits and the holding‑period rules.

Risk, behaviour and staying power

The best fund is useless if you abandon it in the next downturn. Volatility and underperformance streaks are part of investing—especially for active managers with a specific style. Match the fund’s risk to your tolerance, diversify across complementary strategies, and automate contributions so you keep going when markets are noisy.

Case studies (illustrative)

Case 1: Building a simple core with a balanced fund

A couple in their 40s wants an easy, diversified core with moderate risk. They choose a balanced managed fund on their platform, set up monthly contributions, and reinvest distributions. Their satellite positions—an Australian equity income fund and a global small‑cap fund—add targeted tilts.

Case 2: Retiree income with tax efficiency

A retiree prioritises reliable distributions. They use an Australian equity income fund to access franked dividends, paired with investment‑grade bond funds for stability. They hold the mix across super (pension phase) and personal names to manage tax and cash flow.

Case 3: Business owner and liquidity planning

A business owner wants funds available to seize opportunities. They prefer unlisted managed funds for core holdings but keep a sleeve in ETFs for intraday liquidity. Distribution reinvestment is turned off so cash builds for tax and upcoming expenses.

Common mistakes to avoid

• Chasing last year’s top performer without understanding the style or risk that drove it.
• Ignoring buy/sell spreads and platform fees when switching funds frequently.
• Skipping the PDS and missing key risks (derivatives use, concentration, liquidity).
• Overlapping funds that all own the same top 10 holdings (false diversification).
• No plan for where to hold income‑heavy funds (super vs personal) from a tax perspective.

Our overview on The Role of Superannuation in Your Investment Strategy can help with that decision.

Implementation: a simple roadmap

1) Clarify goals and risk tolerance (timeframe, drawdown capacity, required return).

2) Choose core vs satellite roles for each fund to avoid overlap.

3) Shortlist 2–3 funds per role; read the PDS and compare fees and net performance.

4) Decide where to hold each fund (super vs personal; platform vs direct).

5) Set contribution and rebalancing rules (e.g., 60/40 tolerance bands).

6) Track after‑tax outcomes and keep annual tax statements/AMIT statements for your accountant.

If you’d like help drafting this plan, our 6‑Step Financial Advice Process outlines how we work.

Where to from here?

If you’re comparing managed funds with ETFs or managed accounts, we can help you build the right mix. Start here or explore Financial Planning & Investment Advice for next steps.

General information only. This is not personal advice and doesn’t consider your objectives, financial situation or needs. Always read the PDS and seek professional advice before investing.