Date published: 18/12/2010
Introducing internally geared share funds
Geared funds are an alternative to margin loans for investors who would like to increase geared investment exposure in their portfolio without the potential for margin calls.
Internally geared managed funds are an attractive alternative to margin lending. Rather than borrowing to invest, the fund borrows on your behalf which means you don't have to increase your personal borrowing. There are a number of benefits:
* Lower interest costs since the fund usually borrows at highly competitive institutional rates.
* No margin calls as they are paid by the fund manager and not the individual investor.
* No credit checks and no stamp duty.
* No need to provide collateral or security.
* No additional recourse to your assets outside the fund in the unlikely event the fund defaults on its lending facility.
Tony, aged 30, had $10,000 to invest in Australian shares on 1 July 2009. After speaking to his adviser, he decides to invest his funds in the Perpetual Geared Australian Fund.
The value of Tony’s $10,000 investment as at 30 September 2010 had increased to $14,567 (i.e. an increase of over 45%). By comparison, had Tony invested his funds into the All Ordinaries Index the value of his $10,000 investment as at 30 September 2010 would be only $11,786.
As you can see, Tony’s financial position can improve significantly through investing in an internally geared share fund. The extra $2,781 return generated from the Perpetual Geared Australian Fund (i.e. $14,567 less $11,786) is mainly due to the benefits of gearing in a rising share market.
Please note that geared funds can magnify your gains in a rising market but can also magnify the losses of the fund in a falling share market. It is important that investors are aware of the risks and hold a diversified portfolio.
For more information, or to discuss the specifics of using a SMSF in your financial situation, please contact me directly.
Now that you have read this, what do you think? Do you have other ideas? Please share you views with other members (eg by blog or on the discussion forum) and/or request professional member(s) to contact you directly.