🌱 BeginnersWhat are managed funds and ETFs, and how do you choose?
A managed fund is a shared pool: many investors put money in, and a manager buys a basket of assets according to the fund's rules. You own units in the fund and share in both the rise and the fall. Managed funds — including every KiwiSaver fund — are the most common way to invest in New Zealand because they spread risk automatically and take little work. But the difference between a good and a bad fund can be large, mostly because of the fee. Here we go through the fund types, how the fee affects the end result, and what to look at before you choose.
The most common fund types
Funds are usually labelled by how much risk they take. A growth or aggressive fund holds mostly shares — highest expected return, largest swings. A balanced fund is a mix of shares and bonds. A conservative or defensive fund holds mostly bonds and cash — smaller swings, lower return. A cash fund is close to a bank account. Index funds within any of these categories track a market index at a low fee rather than trying to beat it.
Actively managed funds try to pick winners and charge more for it. Research shows most active funds do not beat their benchmark after fees over the long term — which is why low-fee index funds have become a common core holding, in KiwiSaver and outside it.
Why the fee matters so much
The fund fee is quoted as an annual percentage of your balance and is deducted continuously, whether the fund does well or badly. The difference between 0.3% and 1.2% sounds small, but over 30 years it can cost tens of thousands of dollars on a KiwiSaver balance, because the fee also removes the future return on that money. The Sorted KiwiSaver fund finder and the fund updates providers must publish let you compare fees directly.
Be wary of funds sold with a commission to an adviser or through a bank branch — they often carry higher fees. Switching KiwiSaver providers or funds is free and does not trigger any tax, so there is no cost to moving to a cheaper fund with the same risk level.
How to choose
For most people the choice is: pick a risk level that matches your time horizon, then pick the lowest-fee fund at that risk level from a reputable provider. For KiwiSaver decades from retirement, that usually means a growth or aggressive index fund. As you get within about 10 years of needing the money, some people shift towards balanced.
Outside KiwiSaver, one or two broad, low-fee funds is enough: a global share fund as the core, optionally paired with a bond fund if you want to lower the risk. More funds rarely give better diversification and just make things harder to follow.
Frequently Asked Questions
- What is a reasonable fund fee?
- For a broad index fund or a low-cost KiwiSaver fund, roughly 0.2-0.6% a year is common and reasonable. Actively managed and bank-default KiwiSaver funds are often 1% or more. The higher the fee, the more the fund has to outperform just to break even against a cheap index fund.
- What is my PIR and why does it matter?
- Your Prescribed Investor Rate is the tax rate a New Zealand fund (a PIE) uses on your share of its income — 10.5%, 17.5% or 28%, based on your income over the last two years. If your PIR is set too high you overpay tax that you cannot fully claim back, so check it is right with your provider.
- Can I lose all my money in a broad fund?
- In practice not in a broad global share fund, because it owns thousands of companies in many countries. The value can fall sharply in a downturn — a growth KiwiSaver fund can drop 20-30% in a bad year — but every company in the world becoming worthless at once is not a realistic scenario. Individual shares and narrow funds are a different matter.
Informational content, not financial, tax or legal advice. Check amounts, limits and current rules directly with the official sources (Work and Income, the Reserve Bank of New Zealand, Inland Revenue, the Depositor Compensation Scheme) before making a decision.
