An MIS is an arrangement whereby one’s money is pooled together with other people or investors.

Managed funds are referred to as Managed Investment Schemes (“MIS”). These funds are managed by a company with an appropriate Australian Financial Services Licence (“AFSL”). These companies are referred to as Responsible Entities or trustees.  The Responsible Entity will often enter into an Agreement called an Investment Management Agreement under which they will appoint another company to manage the investments of the MIS. This company is referred to as the investment manager. The main duty of the investment manager is to buy and sell shares or other assets and generally manage the investments on behalf of the MIS.

Most MIS’ are structured as Unit Trusts but some have individual accounts. For Unit Trusts, investors acquire units in the trust at their current value.  Many MIS’ allow redemptions but others are illiquid, for example, some property trusts. With illiquid funds the Responsible Entity will usually try to accommodate a sale of units in the case of death or other hardship.

There are a vast variety of Managed Funds. Some property schemes, for example, offer monthly distributions. These may appeal to retirees seeking monthly income at a higher yield than what they would receive from a bank. Of course, higher yield comes with higher risk.

Other Managed Funds invest in property development, mortgages, peer to peer lending, securities and derivatives in Australia and overseas, etc.

Funds are classified by how they are managed. An actively managed fund is one where the fund manager buys and sells investments in a bid to outdo a specific market index. With a passively managed fund, a portfolio of assets, commonly Exchange Traded Funds, that mimic an index is bought. The return on investment is quite similar to the index that it is tracking.

Unit trusts distribute their income to unit holders each financial year. This income is taxable in the hand of unit holders. Most unit trusts are not of themselves taxable unless they are a trading trust, in which case they are taxed as a company. Trading trust pay franked distributions to their unitholders.

Investors should consider investing in a diverse portfolio of funds. A diverse portfolio includes a mix of assets such as property, shares in both Australia and overseas, cash and bonds.

Managed funds are designed for people who wish to invest in a variety of assets as a way of benefitting from the skills of investment managers. It is important that one exercises discretion and due diligence when choosing a Responsible Entity and investment manager. Investors should also be aware of what fees they must pay and should go through the terms and conditions of the Product Disclosure Document or Information Memorandum carefully.

MIS’s normally issue tax statements each financial year to enable investors to easily complete their income tax returns.

David Butterfield is very experienced in applying for AFSL’s for those companies wishing to have a licence. He also has extensive experience at setting up MIS’, including project managing all aspects of the scheme. Negotiating with the various parties, instructing solicitors, preparation of disclosure documents, managing the accounting and funds administration process, etc