THIS SITE IS INTENDED FOR ADVISER USE ONLY

By clicking through to the Investments or Platforms site below you confirm that you are a licensed adviser operating under an Australian Financial Services License.

What are geared investments, and how do they work?

There are many investment options available to you for investing, including geared options. But what are they and how do they work? We explain below.

What are geared investments?

Simply put, gearing involves borrowing money to invest. For example, a geared investment option (or fund) takes an investor’s original investment and borrows additional money with the aim of increasing its size, magnifying its investment exposure and offering the investor broader access to investments. Borrowing can be managed within a fund, often with little to no recourse to investors other than a potential loss of capital if the market value of the fund’s investments should fall.

How can you access geared investments?

Geared investments generally comprise higher-risk asset classes like shares and property. These investments can be accessed in a fund offered by an investment provider or via an online trading platform. Colonial First State also has several geared options available within and outside of super that offer access to professionally managed portfolios of shares and property securities.

 

Note: Please refer to the relevant Product Disclosure Statement (PDS), reference guide and Financial Services Guide before making an investment decision. Fees and costs apply.

How do geared investments generate returns?

For investment options offered outside of super, returns from geared investments can come from capital growth and income that is paid to investors through fund distributions to their account or through distributions that are reinvested back into investment options.

 

For investment options within super, distributions are retained in super and form part of one’s super balance. This balance fluctuates higher and lower over time depending on the contributions members make to super as well as the performance of the various options their super is invested in.

What can impact geared investments?

While there may be benefits to choosing geared investments such as broader market exposure and, therefore, an increased potential for larger financial gains, there are also risks involved – including:

 

  • regular fluctuations in the value of one’s investment, as higher-risk asset classes like shares and property can be more volatile
  • asymmetrical returns – i.e. when markets are rising, gearing could increase potential financial gains, but in a falling market, gearing can magnify any losses by including not only the capital invested, but also the amount borrowed and any interest payable on the borrowed funds.

Why invest in a geared option?

What you choose to invest in will depend largely on your personal circumstances, age, life stage as well as the advice you may receive from a financial adviser. Geared investments in shares and property can have a higher risk-return profile – meaning, in exchange for their short to medium-term risk, geared investments have the potential to deliver higher returns over the long term. For this reason, many investors with decades to retirement may choose geared investments as they will have more time to ride out any impacts from market fluctuations and generate returns. Consider speaking with a financial adviser to help determine whether geared options are right for you.

Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. CFSIL also issues interests in products made available under FirstChoice Investments and FirstChoice Wholesale Investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. The Target Market Determinations (TMD) for our financial products can be found at www.cfs.com.au/tmd and include a description of who a financial product is appropriate for. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from www.cfs.com.au or by calling us on 13 13 36.