Whether we are talking about commercial activities, government, leisure pursuits or just day-to-day living the use of jargon is very evident. That is, specialised language concerned with a particular subject. The financial services sector abounds with terminology relevant to its activities and products and it can help the user of these services to sometimes simply go back to basics to make sure everyone understands what is meant by certain words or terms.

An oft-used phrase is “managed fund”. The product providers keenly push the potential benefits of their managed funds. For instance: easy diversification; expert money management; invest for income, growth or both; convenient regular savings plan. These benefits are fine, however, this marketing stuff does not explain how a managed fund works. Let’s lift the lid on the operation of managed funds and make sure we understand what is going on.

There are a variety of different styles and tax structures for managed funds. In later articles we will cover how entitlement to income and capital growth from the investments are handled, how superannuation funds and insurance bonds differ from managed funds that distribute their taxable income to investors, explain the differences between unlisted and listed managed funds and also how “active” funds contrast with “passive” funds. For now, let’s focus on plain vanilla unlisted managed funds where the investor is responsible for any tax on investment earnings.

These managed funds operate as unit trusts, a well-established and cunningly effective way of dealing with pools of money for collective investment where new participants in the pool can easily join and departing participants can be paid out without disrupting things for the other participants. The participants in these structures are called “unitholders”.
When a new unitholder joins (or an existing unitholder invests more money in the pool) new units are issued by the fund manager. When an existing unitholder leaves, their units are redeemed by the fund manager. So, new units could be issued and existing units redeemed every day impacting the number of units on issue. The price at which new units are issued or existing units redeemed is where the effectiveness of this structure comes in.

The fund manager would value the investments held in the collective pool, typically every day where prices are readily available. These investments could include cash deposits, interest-bearing securities and listed shares. Physical properties are valued less frequently. So, the total value of the collective investment pool is calculated (let’s say this is $100,000,000) then the number of units on issue is sourced (let’s say this is 25,000,000 units). Dividing the value of the pool by the number of units on issue gives the worth of each unit (in this example $4-00 per unit). If no new units were issued nor existing units redeemed and the underlying value of the investments in the pool increased the next day to $100,500,000 then each of the 25,000,000 units would have an underlying value of $4-02. In practice the numbers would not be neat and round as shown here.

So, if new units are to be issued the underlying worth of each unit might be $4-00; many unit trusts would charge a small premium for issuing new units, so the actual issue price might be $4-01. A new investment of $25,000 would receive 6,234 units at $4-01 each. If existing units are to be redeemed the underlying worth of each unit would also be $4-00; many unit trusts charge a small amount for redeeming existing units, so the actual redemption price might be $3-99. A redemption of 5,000 units would receive proceeds of $19,950 at $3-99 each unit. The “buy/sell” difference between the issue price, redemption price and unit price is retained by the fund and is designed to avoid continuing unitholders being negatively impacted by transaction costs incurred when new units are issued or existing units redeemed.

So, unit trusts are a simple and effective way to administer pools of investments where new participants can join and existing participants leave with minimum fuss.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs. If you would like more tailored advice, please contact us today. One of our friendly advisers would be delighted to speak with you.

1. Protect your biggest asset; Income Protection

What would you say is your biggest asset? Your home? Car? Maybe. But what about your income? Say for example your annual salary is $70,000 plus superannuation guarantee. By the time you reach age 65, your cumulative income will reach $4,667,000 (assuming a salary increase of 3.5% p.a.). So why not protect it? Income protection will pay you a regular income in the event you are unable to work due to illness or injury. Benefits are capitalised by insuring to the maximum available cover of 75% of your gross earnings (your total fixed remuneration package, including fringe benefits and any other earned income excluding investment income). A various number of waiting periods are available ranging from 14 days to 2 years. Benefits are then paid for periods ranging from 2 years to age 70. Premiums for Income Protection are tax-deductible to the individual and the benefits payable are taxed as assessable income.

2. Know your Superannuation

Many of our clients have noted that they are unaware of their superannuation; it’s not much more than a line on each pay slip. They aren’t sure how many accounts they own or what is in their most active account and seem to have the general perception of “Why should I have to worry about super when I can’t access it for another 30-40 years?” To keep it simple, your superannuation is the largest savings account you will ever own; it’s your future. To maximise these savings, you should consider the following:

• Super consolidation – rolling your funds into one manageable account. This is to ensure your funds aren’t being gobbled up by pesky administration fees.
• Salary sacrifice considerations – Salary sacrificing falls into the Concessional Contributions category, along with Superannuation Guarantee contributions from your employer. You do have to be careful you don’t exceed the caps. Be sure to talk to an adviser about your options regarding salary sacrificing.
• Risk profile – as a young investor, you may be comfortable taking on a little more risk with your investments via superannuation. Generally speaking, industry funds default to a balanced portfolio. The average return on these accounts is generally CPI (Consumer Price Index) plus 5%.

3. Create Wills and Power of Attorney (POA)

Estate planning is necessary for all adults. We have found clients tend to underestimate the size of their estate. Normally when a new industry super fund is opened, there is a certain amount of default cover attached to the fund. If you have a number of industry super funds, your cumulative death benefits may enter into the hundreds of thousands of dollars, but will it go to whom you wish? There is an interesting case, McIntosh vs McIntosh, where a simple estate plan could have made a huge difference in the distribution of benefits. McIntosh, a young male passed away following an accident. He had a number of super funds each with death benefits attached. His mother, was in an interdependent relationship with her son, and justly applied to receive the benefits. However, McIntosh’s father, whom he had no relationship with, appealed the decision and was awarded half of the death benefits. In the eyes of the court, the father had every right, but was this the outcome McIntosh would have wanted? Seek advice from a professional and avoid the ‘do it yourself’ option. We can’t stress enough the importance of having a valid and up to date will in place.

Please note that the above has been provided as general advice, it has not taken into account your personal circumstances or financial goals. If you would like more tailored advice, please contact us today, one of our friendly advisers would be delighted to talk to you.