Sarah’s aunt bequeathed her $60,000 in her Will. Sarah had never accumulated substantial savings beyond her KiwiSaver fund, and wanted some tips on making wise investment decisions. We turned to Liv Lewis-Long at Simplicity, posing five questions that could potentially help shape Sarah’s financial future.

Is an investment fund basically the same as investing in shares?

No, investing in an investment fund differs significantly from investing in individual shares. When you invest in shares, you own specific company stocks and make independent buying and selling decisions. In contrast, investing in a managed fund involves purchasing “units” managed by a fund manager. The manager makes decisions on buying, selling, and holding assets on behalf of the fund, providing a higher level of diversification compared to individual shares. Opting for a fund offers a more hands-off approach, especially beneficial for those averse to extensive research on individual companies.

Am I tied into making regular contributions to my fund, or can I alter these? Is there usually a minimum investment amount?

No ongoing contributions are usually required for a managed fund, distinguishing it from KiwiSaver funds. It’s entirely up to you whether to make regular contributions and how much. Some funds have minimum investment amounts to minimize administrative burdens and costs. For instance, Simplicity’s funds have a $1,000 minimum, with low fees (0.1% to 0.25%). Lowering minimums could challenge fee sustainability, as managing applications and ongoing investments becomes proportionally more significant.

What fees and charges will I pay for an investment fund, and are they one-off or ongoing?

Fees vary among fund managers. Actively managed funds generally incur higher fees. Fund managers charge an annual percentage based on your fund balance, with additional costs like transaction fees, performance-based fees, and administrative charges. At Simplicity, a single percentage-based annual fee is charged for each fund (e.g., 0.1% for the global share fund, 0.25% for diversified funds), calculated daily and deducted monthly.

What’s the difference between a term deposit and a managed fund?

A term deposit is a stable, low-risk investment with a fixed amount invested for a specified period, guaranteeing a predetermined rate of return. In contrast, a managed fund involves fluctuating asset values and no assured return. Managed funds offer potential long-term returns with varying short-term outcomes, including a recommended investment duration. Term deposits lack the diversification of managed funds, focusing on a single asset type.

How do I choose which type of Investment Fund to invest in?

Choosing an investment fund depends on risk tolerance, investment goals, and time horizon. Consider the fund’s risk profile (conservative to aggressive) and whether you prefer actively or passively managed funds. Evaluate the types of assets the fund focuses on (e.g., shares, bonds, property). Understand fees and charges, and factor in long-term performance. Other considerations include ease of withdrawals, the fund manager’s reputation, distribution payments, and aligning choices with specific needs and goals through research.