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Shares vs Managed Funds

Step 7 of 14 in the pathway Investing for the first time
Previous: Index funds and ETFs · Next: What fees actually cost you

⚖️ Two Ways to Own Investments

When you invest in companies, you can either buy shares directly, picking individual companies yourself, or buy a managed fund, where your money is pooled with others and a manager or index does the holding for you. Both can be sensible; the right one depends on how much time, knowledge, and diversification you want.

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Key Point: Buying shares directly means choosing individual companies, giving you control but requiring research and risking poor diversification if you hold only a few. A managed fund pools your money with others to hold a wide spread of investments, giving instant diversification and less effort, in return for a fee. Many people use funds as their diversified core and, if they wish, hold a small amount of direct shares for interest. For most, a diversified fund is the simpler, lower-risk route.

The Core Difference

FeatureDirect sharesManaged fund
You chooseIndividual companiesA fund; the manager or index holds many
DiversificationOnly if you hold manyBuilt in
EffortHigher: research and monitoringLower: largely hands-off
CostTrading costs per shareAn ongoing fund fee

Both Are Owning Companies

Either way you end up owning a share of businesses and their growth. The difference is whether you pick the companies yourself or let a fund hold a broad spread for you.

📈 Direct Shares

The Appeal

  • Full control over which companies you own
  • No ongoing fund fee, though trading has costs
  • The interest and engagement of picking companies

The Catch

  • Poor diversification if you hold only a handful of shares
  • It takes research, time, and emotional discipline
  • One company failing can hurt a concentrated holding badly
Concentration is the big risk: Holding just a few companies means one going badly can sink your returns. To get real diversification with direct shares you need many holdings, which is more work and cost. This is exactly what a fund does for you.

Picking Winners Is Hard

Consistently choosing companies that beat the market is difficult, even for professionals. Many direct investors would have done as well or better in a low-cost diversified fund, with far less effort.

🧺 Managed Funds

The Appeal

  • Instant diversification across many investments
  • Largely hands-off, the holding is done for you
  • Easy to start with small, regular amounts

The Catch

  • An ongoing fee, which varies a lot between funds
  • Less control over the exact holdings
  • Actively managed funds may charge more without beating a low-cost index

Active vs Index Funds

Managed funds can be actively managed, where a manager picks investments for a higher fee, or index funds that simply track a market cheaply. See our Index Funds and ETFs guide for why low-cost index funds are popular.

A fund pools many investors' money
It holds a wide spread of investments
You get diversification for an ongoing fee
Index funds keep that fee low by tracking the market

💡 Which Suits You and Mistakes

Choosing Your Approach

  • Want simplicity and diversification? A managed or index fund is the easy core.
  • Enjoy research and want control? Direct shares can suit, ideally alongside a diversified base.
  • Short on time? A fund does the work for you.

Common Mistakes

Mistake 1: A Few Shares and Calling It Diversified

Holding three or four companies is concentrated, not diversified. One failing can hurt badly.

Mistake 2: Assuming Active Funds Always Beat Index Funds

After higher fees, many active funds do not. Compare fees and long-term performance.

Mistake 3: Overtrading Direct Shares

Frequent buying and selling adds cost and rarely improves results.

Mistake 4: Ignoring Fees and Tax

Fund fees and the PIR, or FIF rules on overseas shares, all affect your net return.

A Simple Approach

1. Use a diversified fund as your core
2. Only pick direct shares if you want the effort and control
3. Keep any direct holdings a small part of a diversified whole
4. Watch fees, trading costs, and tax
5. Invest regularly and hold for the long term

See our Investing Basics and Diversification guides. Final word: direct shares give control but need research and risk poor diversification, while managed funds give instant diversification and less effort for a fee. For most people a diversified, low-cost fund is the simpler core, with direct shares an optional extra. This is general information, not financial advice.

Work it out: ETF vs Managed Fund Calculator

🎯 Test Your Knowledge

Quiz on Shares vs Managed Funds (20 Questions)

1. Buying shares directly means:
A manager choosing for you
Holding only cash
Lending to a bank
Choosing individual companies yourself
2. What best describes a managed fund?
Holds a single company
Is a savings account
Cannot be diversified
Pools money to hold a wide spread of investments
3. Direct shares give you:
Control, but require research
Automatic diversification
No effort
Guaranteed returns
4. A managed fund gives:
No diversification
Instant diversification and less effort, for a fee
Free management
Single-stock risk
5. The big risk with direct shares is:
Too much diversification
No risk at all
Concentration if you hold only a few
Low fees
6. To get real diversification with direct shares you need:
Just one share
Many holdings, which is more work and cost
No shares
A single bond
7. Consistently picking market-beating companies is:
Easy
Difficult, even for professionals
Guaranteed
Risk-free
8. Managed funds charge:
Nothing
A one-off fee only
A government tax
An ongoing fee that varies between funds
9. Active funds may:
Always beat the index
Charge nothing
Charge more without beating a low-cost index
Hold only cash
10. For most people, the simpler core is:
A handful of direct shares
A single hot stock
A diversified, low-cost fund
Day trading
11. Direct shares cost you:
Trading costs per share
An ongoing fund fee
Nothing
A government levy
12. Many people use funds as:
A replacement for all saving
A way to avoid investing
A diversified core, with optional direct shares
A single-stock bet
13. Holding three or four companies is:
Fully diversified
Concentrated, not diversified
Risk-free
The same as a fund
14. What happens when you overtrade direct shares?
Adds cost and rarely improves results
Guarantees gains
Removes fees
Is the best approach
15. Both shares and funds ultimately involve:
Owning a share of businesses
Only holding cash
Lending to the government only
No ownership
16. A fund means the holding is:
Entirely your daily job
Impossible
Free of any cost
Done for you, largely hands-off
17. If you are short on time, which investment approach suits you best?
Direct shares are easier
A fund does the work for you
You should not invest
Trade every day
18. Fees and tax (PIR, FIF) affect:
Nothing
Only the manager
The weather
Your net return
19. Direct shares suit you if you:
Enjoy research and want control, ideally with a diversified base
Want zero effort
Have no time
Dislike owning companies
20. The overall message is:
Always pick individual shares
Never use funds
A diversified low-cost fund is the simpler core; direct shares are an optional extra
Hold one company only

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Frequently Asked Questions

What is the difference between shares and managed funds?

Buying shares means owning individual companies directly; a managed fund pools your money with others to buy a diversified basket, managed for you.

Are managed funds safer than shares?

They are usually more diversified, which spreads risk, but they still rise and fall with markets and charge fees for the management.

Do managed funds have fees?

Yes, an annual management fee and sometimes others. Lower-cost index funds charge less than active funds.

Which is better for beginners?

Many beginners prefer diversified low-cost funds for simplicity and built-in diversification, rather than picking individual shares.

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