The paper "Managed Funds, Meaning of Diversification and How It Affects Risk and Return" is a good example of a finance and accounting assignment. As the name suggests, managed funds are investment funds which are professionally managed by a professional funds manager who invests in a number of investments. However, the actual mix and type of the investments that compose the fund usually depend on a predetermined mandate which is communicated by the fund manager. The fund is usually comprised of different asset classes such as cash, property, fixed interest, property and shares.
When an investor gives his /her money, it used to buy assets in line with the objective of the investment. People who invest in a managed fund are given a certain number of a unit whose value is calculated on a daily basis and changes as the market value of the assets composing the fund rise or falls (James, 2010). There four types of managed funds which include unit trusts, superannuation funds, group investment funds and insurance bonds. Managed funds are popular forms of investment due to a number of reasons including; the ease of diversifying one's investment, the fact that the funds are managed by experts the ease of reinvesting one's investment earnings the ease of setting up a regular investment plan The ability to start investing even with very small amounts of money. 3.
Meaning of diversification and how it affects risk and return Diversification is a technique for managing investments by way of mixing a big variety of investments within a portfolio with an aim of minimizing the impact which anyone given security/asset could have on the overall performance of the portfolio. The effect of diversification is to lower risk associated with one's portfolio and hence increase expected returns (Oleg, 2011).
For instance, if one invested all his funds in property in 2009, he/she would have made a loss from the investment. Similarly, if he/she invested his money on Aust and Global shares, he would have made a loss (as can be seen in table1). However, suppose the person split the money into four and invested part of it in property, bonds, cash and shares; half of the investment (property and shares) would have yielded a loss while half of the investment (bonds and cash) would have yielded some interest.
These means that by diversifying his /her investment to more asset classes, the person would have reduced the loss made and even make an overall profit. Diversification, therefore, helps in reducing risk and increasing returns. However, when diversifying, one should try to invest in a combination that minimizes the overall risk or that which has the potential for the greatest returns. 4a) asset class Investments are classified into different groups. These groups are the asset classes.
An asset class is a group of investments/securities which have/show similar characteristics and /or behave in a similar manner in the market place and are subjected to the same rules and regulations. Asset classes include the stocks, bonds, cash equivalents as well as property.
James, K2010, Introduction to managed funds international finance journal, Vol.8, No.125, Pp14-26
Oleg, D2011, Investing in actively managed funds Journal of applied Economic sciences, Vol.5, No.15, Pp7-15.
Doyen, O2010, The arithmetic active management University press: Cambridge
David, S2005, Introduction to finance Light House Publishers ltd, Melbourne.
Jane, B2009, Fundamentals of finance Oxford university press, Sydney.
James, W2001, Introduction to finance: making wise investment decisions, Prentice Hall, London.