The biggest attraction of investing directly in managed funds is the generous cost saving. By bypassing a financial planner, an investor can save on upfront commissions of up to 5 per cent and ongoing commissions, called "trails", of up to 0.6 per cent a year.

Investment platforms, or wraps, as they are sometimes called, allow investors to access a menu of managed funds and make transactions online, or mostly online.

The services are provided by low-cost discount brokers, which vary widely in what they offer the public. The brokers generally fall into two camps.

The first type offer a narrow selection of funds and fairly basic portfolio management tools, which are "clunky" to use. Often there are reams of paperwork to be filled out.

The second are more sophisticated. They are more akin to managed fund supermarkets, offering thousands of funds and a large selection of portfolio management tools and research. These services are often referred to as "wraps".

Depending on which provider you choose, costs can vary substantially even among those with similar capabilities. Here's a guide to what's available.

Platform

The advantage of using a platform is that it will rebate the upfront commission and often take only a part of the trail commission for itself. Retaining this capital allows your investment to grow more quickly.

The most sophisticated platforms generally run by the big financial institutions are mostly available only to financial advisers or investors with self-managed super funds.

But for those who want to start a savings plan using managed funds outside of super, there are about half-a-dozen major providers available to choose from.

InvestSmart (owned by Fairfax Media, the publisher of this newspaper) and the Commonwealth Bank-owned CommSec offer more than 1000 funds, with a minimum investment amount of $1000 per fund, depending on which funds are selected.

The newest entrant to the market, RaboPlus, offers only 75 funds but has a minimum investment amount of $250, for each of the 75 funds.

A recent report by Investment Trends, commissioned by RaboPlus, comparing online platforms found the Commonwealth Bank-owned Colonial FirstChoice Wholesale provides the most comprehensive range of services for investors.

FirstChoice Wholesale also has good portfolio management functionality, such as allowing investors to view their portfolio by asset allocation and by investment manager. It also has the fastest transaction times of the six platforms. But to use FirstChoice Wholesale, investors need a minimum investment amount of $100,000.

What an investor will pay to use a platform will vary, depending on types of managed funds accessed, the amount invested and the investment time frame.

Costs

To get a handle on the real costs, Investment Trends used a diversified fund, which has different assets in its portfolio mix. It assumed that $100,000 was invested and compared the costs over five years.

Taking the "growth" portfolio, which is a mix of managed funds with a split of 70 per cent in growth assets such as shares and property and 30 per cent in fixed interest and cash, Investment Trends found investors would pay $1672 with CommSec each year over the five years, $1671 with InvestSmart, $1438 with E*Trade Australia and $909 with RaboPlus.

As the investment produces the same returns, the differences in costs will make a big difference to an account balance over five years.

FirstChoice Wholesale and 2020 Directinvest could not be included in the comparison because there were not enough common funds (not all the same funds were available on each platform) to enable a fair comparison. "Colonial FirstChoice Wholesale, on an asset weighted basis, has an average fee of under 1 per cent," says the general manager of distribution at Colonial First State, Paul Barrett.

Online

When applying to invest in managed funds with CommSec, InvestSmart and 2020 Directinvest, investors are sent the application forms by the platform, which they must fill in and send to the fund managers. It is also a paper-based process when buying additional units or selling units.

RaboPlus, FirstChoice Wholesale and E*Trade have integrated, or partly integrated, cash accounts from which the managed funds can be funded.

RaboPlus has the most highly integrated cash account and its members can apply for initial and subsequent units in managed funds completely online and with no paperwork at all.

Portfolio tools

Some platforms, such as E*Trade, RaboPlus and FirstChoice Wholesale, automatically keep a record of the value of the portfolio.

With CommSec, InvestSmart and 2020 Directinvest, the investor has to manually enter the unit prices of the funds and how many units the investor has.

With CommSec, 2020 Directinvest and FirstChoice Wholesale, investors can view their portfolio of managed funds by asset allocation showing how the portfolio is spread across asset classes.

Only FirstChoice shows the historical performance of funds. Most platforms provide some financial news and some basic educational tools, portfolio watchlists and newsletters. RaboPlus rates particularly well in investor education and online tools.

Shares

Investors who have gained some experience and confidence in managed funds may want to invest in direct shares as well. E*Trade and CommSec offer share trading, while RaboPlus and FirstChoice Wholesale do not.

InvestSmart and 2020 Directinvest offer share trading through CMC Markets and members of these platforms get discounted share brokerage from CMC Markets. With InvestSmart and 2020 Directinvest, as with managed funds, the application form to buy and sell shares has to be downloaded from the platforms' websites and the form then sent to CMC Markets.

Tax management

The platforms provide a standard capital gains tax statement when units have been sold during the financial year. This is based on the "first in, first out" method, which means the units sold are not always those that result in the smallest capital gains tax liability.

The method suits most people as any disadvantage would be small. But RaboPlus, as well as providing the usual method, also allows unitholders to calculate capital gains tax on individual parcels of units.

This could help those with other investments who are trying to offset capital gains and losses in the most tax-efficient way across their entire investment portfolio.

Index funds

Investors considering managed funds may want to consider index funds. These funds mirror or track a market, such as the Australian stockmarket.

With index funds, the investor does not have to worry that they may have picked dud managers, as the investors are basically buying the market.

Vanguard Australia is the best known index manager and it has a series of diversified index funds called LifeStrategy funds. They invest across the asset classes of shares, listed property and fixed interest. The four funds include High Growth, Growth, Balanced and Conservative versions and each invests across the market in differing proportion to give differing risk-versus-return profiles.

The Balanced Fund has about half of the money in "growth" investments such as property securities and Australian and international shares, and the other half in "income" investments such as Australian and international fixed interest and cash. They can be well-suited to DIY investors.

Buying directly from Vanguard is the cheapest way to access the funds.

The only cost is an investment management fee of 0.9 per cent a year, less for large amounts of more than $50,000 per fund and there are no entry or exit fees. There is a minimum initial investment amount of $5000 per fund.

Vanguard Australia has some useful tools and calculators on its website.

In the beginning

Investing in managed funds is a good way to gain experience. People with small amounts at their disposal can obtain a diversified investment, which they could not otherwise achieve with limited capital.

A managed fund is a trust where the assets are divided into units. The fund can invest in a market, such as the Australian sharemarket, or in several markets and across different asset classes.

Over an investment time frame of at least five years, unit prices usually grow and at least twice a year income is distributed to unitholders. The units can be redeemed at any time for cash at the prevailing unit price. The aim should be to have a good mix of managers and to keep the costs down.

The platforms provided by discount brokers offer a good spread of funds and asset classes - and at lower costs.

However, a problem for self-directed investors is choosing from the thousands of funds on offer.

There is more to selecting a managed fund than its recent performance history. This is where "qualitative" analysis comes in. This is an analysis of a manager's investment process, investment philosophy and the quality of the fund's people.

The investment researcher Morningstar is one of the best publicly available sources of managed funds research. On pages 14 and 15 of the Money section there are tables of funds' performances and Morningstar star ratings. By registering at morningstar.com.au readers can access some fund information for free.

Some of the managed fund platforms also offer managed fund research for their members, usually for a subscription fee.

WRAPPED UP. WHAT YOU GET. Source: Investment Trends. Table not available on database