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Geared funds are an alternative to margin loans if you want to have some geared investments within your portfolio. 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.
Please note that geared funds do have a downside. If a 2:1 geared fund has a 50% fall in value on their underlying investments, then the fund will go completely broke. The actual equity would be zero, as borrowings would equal assets. So investors in a geared fund have to be aware that such a possibility exists and as such don't put 100% of your assets into geared funds.
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