A unit trust is a legal structure that pools money from multiple investors and invests it according to a stated investment objective. When you invest, you purchase 'units' representing your proportional share of the fund's assets.

• Trustee: a responsible entity (typically a large financial institution) holds the assets on behalf of unitholders
• Unit price: calculated by dividing the net asset value (NAV) of the fund by the number of units on issue - typically calculated daily
• Buying and selling: units are purchased from and redeemed by the fund manager directly (not on a stock exchange) - you transact at the next calculated unit price
• Minimum investment: typically $1,000-$5,000 for initial investment, $500-$1,000 for additional contributions
• Unlisted managed funds: not traded on an exchange - you deal directly with the fund manager, usually settling in 2-5 business days
• Listed Investment Trusts (LITs) and Listed Managed Investment Schemes (LMISs): exchange-traded variants that trade like shares on the ASX - combine fund structure with exchange liquidity
• ARSN (Australian Registered Scheme Number): all registered managed investment schemes have an ARSN - you can search at ASIC's register to verify a fund's registration

The most important distinction in managed funds is whether the fund is actively managed (a portfolio manager selects investments) or passively managed (the fund tracks an index).

• Active funds: a portfolio manager and research team select securities they believe will outperform the benchmark - higher fees reflect this cost
• Passive index funds: track a market index (e.g. S&P/ASX 200, MSCI World) with minimal management intervention - lower fees, predictable market-matching returns
• The evidence: over long time horizons, the majority of active funds underperform their benchmark after fees - the SPIVA Australia Scorecard (S&P) documents this annually
• Management Expense Ratio (MER): the annual fee charged as a percentage of assets - active funds typically 0.5-1.5%, passive index funds 0.1-0.5%
• Performance fees: some active funds charge an additional fee if returns exceed a hurdle rate - read the Product Disclosure Statement (PDS) carefully
• When active management may add value: less efficient markets (small caps, emerging markets, private assets) where information advantages are more achievable
• For most retail investors: low-cost index funds or ETFs tracking broad markets produce better long-term after-fee returns than most active alternatives

Managed funds distribute income and capital gains to unitholders rather than retaining them within the fund. Understanding how distributions work is essential for tax planning.

• Distributions: paid at regular intervals (typically quarterly, semi-annually, or annually) - they include interest, dividends, and realised capital gains
• Distribution amount varies: unlike a fixed-income investment, distributions fluctuate based on fund income and any capital gains the manager realises during the year
• Reinvestment option: most funds offer automatic reinvestment of distributions into additional units - useful for compounding, but each reinvestment is a taxable event
• Tax components: your annual tax statement (formerly called a Tax File Number withholding report) breaks down distributions into components - interest, dividends, franking credits, foreign income, capital gains (discounted and non-discounted)
• Capital gains distributions: even if you did not sell any units, the fund may distribute realised capital gains - you pay CGT on these in the year distributed regardless of your holding period
• Year-end distributions: unlisted managed funds often make their largest distributions in June - if you invest immediately before a distribution, you effectively receive your own money back and pay tax on it

The tax treatment of managed fund income can be complex - the fund passes through multiple income types, each taxed differently.

• Interest and dividends: taxed at your marginal rate in the year received
• Franking credits: passed through from Australian shares held in the fund - offset your tax liability or generate a refund
• Capital gains distributions: if the fund held assets for more than 12 months before selling, the 50% CGT discount is passed through to you
• Foreign income: taxed at marginal rate, with a foreign income tax offset available if tax was paid overseas
• Your own CGT event: when you sell your units, you calculate your capital gain or loss based on your cost base - if you have held units for 12+ months, the 50% CGT discount applies
• Cost base tracking: if you reinvest distributions or make multiple purchases at different prices, you need to track each parcel's cost base - use FIFO, LIFO, or weighted average (your choice, but must be consistent)
• Annual tax statement: each fund issues a tax statement by 30 September for the prior year - use this (not just your brokerage statement) for your tax return

ETFs (Exchange-Traded Funds) are technically a type of managed fund, but they have structural differences that matter for Australian investors.

• Trading: ETFs trade on the ASX like shares (intraday at market prices); unlisted managed funds trade at end-of-day NAV directly with the manager
• Minimum investment: ETFs can be purchased for as little as $500 (one share equivalent); many unlisted managed funds require $1,000-$5,000 minimum
• Brokerage: ETFs incur brokerage on each purchase and sale; many unlisted managed funds can be invested in directly without brokerage (or via platforms)
• Dollar-cost averaging: regular small investments suit ETFs poorly (brokerage erodes small contributions) - unlisted managed funds with no minimum transaction are better for regular small amounts
• Tax efficiency: ETFs are generally more tax-efficient because they rarely distribute realised capital gains - the creation/redemption mechanism allows gains to be deferred internally
• Transparency: ETFs typically disclose holdings daily; managed funds may only disclose quarterly or less frequently
• Price certainty: ETF price is known at time of trade; managed fund unit price is not known until calculated after market close

You can access managed funds directly, through a platform (wrap or master trust), or via your superannuation fund.

• Direct: apply via the fund manager's website using the PDS - submit an application form, provide ID (AML/KYC), and transfer funds directly
• Investment platforms (Netwealth, HUB24, BT Panorama, Macquarie Wrap): consolidated reporting, access to hundreds of funds, used by financial advisers - platform fee on top of fund MER
• Superannuation: many industry and retail super funds offer access to diversified managed funds as investment options within the fund
• Product Disclosure Statement (PDS): read this before investing - it discloses the investment objective, strategy, fees, risks, and how to apply
• Target Market Determination (TMD): all funds must publish a TMD describing the type of investor the product is designed for - useful for assessing suitability
• ASIC's MoneySmart: provides a managed fund fee calculator and guidance on comparing fund options

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