Managed Funds vs Property: Which Is the Better Investment?

Investment properties and managed investment funds. Both are popular methods Kiwis use to grow their wealth. Both have the potential to deliver sizeable returns over time - but which is the best option for an investor? In this guide, we'll provide you with all the information you need to make an informed decision on where to place your money.

What is a managed fund in NZ?

A managed fund, also known as a mutual fund, is a simple form of investing, at least for the investor. You choose a fund, you invest money in that fund, and, with the help of professional fund managers, you grow that investment over time. When you're ready, you withdraw your money to realise the profits. You might also earn returns through dividends or interest from the assets that the fund has invested in.

Managed funds pool together a variety of investment types, ranging from low-risk assets like cash and bonds to more volatile securities like stocks. The mix of these assets determines the risk profile of different funds, allowing you to choose one that suits your investment goals and preferences. At AMP, for example, we offer three main types of managed funds:

• Conservative Managed Fund: A cash and bond-focused fund that offers lower risk and reward.
  
• Balanced Managed Fund: A fund featuring a diverse mix of investments that offers medium risk and reward.
  
• Growth Managed Fund: A share market-focused fund that offers higher risk and reward.
  

Managed funds are a simple, flexible and low-cost investment option. AMP Managed Funds do not have a lock-in period or a minimum investment amount and offer low fees of 0.79% per year.

What is an investment property in NZ?

An investment property is real estate that you buy to generate income through rent and short-term letting, and through the increase of the property's resale value over time, also known as capital gains.

Historically, investment properties in New Zealand have grown significantly in value. Unlike a managed fund, these are tangible assets that can be used for non-investment purposes, such as housing friends and family or enjoying a holiday home.

On the flip side, real estate investing requires a large amount of capital. In New Zealand, you usually need a 35% deposit to secure an investment property loan, though you can secure a loan with a 20% deposit if the property is a new build, and some lenders will accept deposits as low as 10%. 

Investment properties are also illiquid assets, meaning they are difficult, time-consuming and somewhat costly to convert into cash. Then there are the complications of tenancy: issues with specific tenants, untenanted periods when you aren’t generating income, and laws around when you can sell a property that’s tenanted.

You also need to cover a range of ongoing costs, including council rates, insurance, utility bills, maintenance, body corporate fees, property management fees and resolving any issues with tenants. These costs can outpace rental income which means you may need to 'top up' your investment by $100, $200 or more per week.

Investment property or managed funds?

Investment property or managed fund: which is right for you? Let's compare a few common features of these investments to see which comes out on top.

• Risk and return profile: AMP Managed Funds (mutual funds) allow you to choose your preferred risk-reward profile, which is conservative, balanced, or growth - Investment properties do not.
  
• Liquidity: AMP Managed Funds are perfectly liquid - you can withdraw your money whenever you choose. Investment properties are amongst the most illiquid assets you can invest in.
  
• Diversification: Diversification is a great way to reduce investment risk. However, very few Kiwis have the necessary capital to buy multiple investment properties. AMP Managed Funds, meanwhile, are inherently diversified - every dollar you invest is spread across a number of assets.
  
• Income generation: Managed funds can generate income through dividends and interest payments. Investment properties are capable of generating greater income through rent but also incur greater costs than income (negative gearing), which can mean you need to regularly 'top-up' your investment.
  
• Capital appreciation: Both house prices and the value of managed funds tend to appreciate in value over time.
  
• Tax advantages and disadvantages: More tax deductions apply to investment properties, but that is mainly because these assets incur more costs.
  
• Investment time horizon: Properties are decidedly long-term investments (unless they are renovated and 'flipped'). Managed funds offer greater flexibility - you can hold your investment for as long as you want and choose a risk and reward profile to suit the investment term.
  
• Market conditions and trends: Investment properties are subject to market conditions. Growth-focused managed funds can be more volatile (and potentially higher reward) than property, while conservative managed funds can be safer (and potentially lower reward) than property.