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How to make your money work harder (without having to risk it all)

Got some savings you want to turn into a secure financial future? A managed fund could be the answer.

With plummeting interest rates and sky-high house prices coinciding with the rise of DIY investing, saving and growing personal wealth for the future has recently taken on a whole new look. And with the Covid-19 pandemic taking KiwiSaver balances on a rollercoaster ride this past year, many New Zealanders have been challenging themselves to sharpen their financial chops, particularly through once difficult investment channels (such as overseas stocks) that have since started to emerge as mainstream options.

But for some, the knowledge, time and composure required to make significant decisions about what to do with their savings is too much to take on. That’s why the managed fund exists. As the name suggests, a managed fund is an investment fund taken care of by a team of experts and made up of a pool of different kinds of assets like cash, bonds, commercial property and shares. If that sounds familiar, it’s probably because most New Zealanders already own a type of managed fund: their KiwiSaver. Just as KiwiSaver is designed to help New Zealanders save, the same goes for regular managed funds, except they don’t have to be locked away for retirement or a first home. 

Managed funds have experienced a surge in popularity in the last few years. Kiwi Wealth, which publicly launched its managed funds almost two years ago, oversees more than $200 million for more than 5,000 customers in New Zealand. Close to half that business has flooded in over the last five months, showing the momentum behind managed funds has never been stronger.

Managed funds are designed to make your money work harder for you while making someone else do the hard work. At places like Kiwi Wealth, a team of experts is on hand to make the big investment decisions so you don’t have to. Your money is spread across a diverse portfolio of investments, meaning the opportunity to grow your money is balanced against the risk that comes with investing – and all you need is $100 to get started. 

We’ve written a thorough explainer of how managed funds work, so now we wanted to explore why they’re such an important product in the current economic environment. 

The low interest environment

Keeping your money in a savings account or term deposit used to make a lot of financial sense – it was a safe option that brought in decent returns, and meant you always had funds on hand for the unexpected. It was a simple and straightforward way of investing for your future, but a lot’s changed since then. 

Plummeting interest rates have meant returns for these options have taken a turn, while even the most risk-averse managed funds have recently proved their value. As a guide, the returns (after fees and before tax) of Kiwi Wealth’s three funds annualised over a two-year period was 4.83% for conservative, 12.15% for balanced, and 17.68% for growth.*

Kiwi Wealth estimates that up to $13 billion which would otherwise be going into the pockets of savers is currently being lost in the low-interest environment. In one calculation, it found a $10,000 investment in a two-year term deposit would result in a little over $10,600.*

“Lowering interest rates frees up more money to spend on goods and services in the economy to keep things ticking along, but for people who’ve typically relied on savings accounts and term deposits, low interest rates have proven really problematic,” says Harley Calder, product manager at Kiwi Wealth.

“You should at least be getting above inflation and at the moment it’s well below that after tax. So in real terms, the money’s going backwards.”

For those new to investing, managed funds are a far less risky choice than many investment alternatives. But while your money will be directly managed on your behalf, Calder explains the three fund options allow you to focus on different outcomes based on your financial plans and immediate needs.

“If you’re looking for a return that’s likely to be better than a term deposit over a shorter investment timeframe, then a conservative fund might be suitable for you if you can’t afford to have large movements in your account balance. Whereas if you’ve got some time on your side, then a growth fund might be better suited.”

Risk and reward

As a result of low interest rates (as well as the economic uncertainty of Covid-19, ongoing housing unaffordability, and a burgeoning community of online investors), many people have turned to other channels for growing their savings – mostly through the stock market. Thanks in large part to the rise of DIY investment platforms, millions of amateur investors around the world have been able to take part in a form of investing that promises to be a faster, more aggressive way of accumulating wealth. 

While the payoffs of stock market investing can be huge, so too can the losses. It’s one of the riskiest forms of investing out there and often involves a level of due diligence that not everyone is going to be willing or able to take on. The same goes for newer assets such as cryptocurrencies which, despite their growing mainstream adoption, remain volatile and unpredictable. 

“When you make a decision to purchase shares in a company, it should be a deliberate, well thought out decision because if you get it wrong, there’s a potential to lose a substantial amount of money,” says Calder. 

“One of the things that makes me nervous is when I hear people saying they bought stock based on just word of mouth and what other people are doing. They’re not actually researching why they’re purchasing stock in a company.”

With historically higher returns than savings accounts and term deposits, and generally lower amounts of risk than pure stock market investing, managed funds can be an ideal option for people looking to make their money work harder and grow faster – all without the need to read annual reports or worry about portfolio diversity. 

Calder says managed funds can be a great option for people with strong savings who may not yet have access to the property market or personal financial advice. For those with some financial security, managed funds can be a powerful way to allow their money to make money.

But that’s not to say there’s no risk in managed funds. That’s particularly the case in a growth fund, which is primarily made up of stocks, and growth investors should be prepared for their account balances to go up and down at any time. The safety net that managed funds provide is in their diversity, meaning your money is spread over many different assets. That makes it easier to manage any risk that might come up from a bad investment.

“You need to think about how you would feel if you did see your balance go down. Would that sit comfortably with you? Would you be prepared to ride out the storm and give it a chance to recover?” says Calder.

“Don’t just look at the returns and which fund has the highest. You really need to take a step back and think about your attitude to risk, what you’re saving for, when you need that money, and then work back from there to choose the fund that works for you.”

* Numbers calculated using the two-year annualised return for the period to 31 May 2021 after fees, and before tax / the average two-year term deposit rate as at May 31, 2019 with interest compounding quarterly, before tax. Kiwi Wealth is the issuer and manager of Kiwi Wealth Managed Funds and reminds investors that past returns are no guarantee of future returns. A copy of the PDS can be obtained here.

This content was created in paid partnership with Kiwi Wealth. Learn more about our partnerships here

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