Working within defined investment parameters for the fund, the fund manager's job is to invest to pooled money in a range of assets. The manager has the right and the responsibility to shift the market conditions dictate. The manager's objective is to achieve as high a sustainable return on the investors' pooled money as possible within certain (usually conservative) risk limits.

All managed funds are run by a 'single responsible entity'. This replaces the two-tier system that operated in the past: where the fund manager invested and managed your money, and a separate trustee represented the rights of the investors. These days the responsible entity combines these roles, and is required to set up precise systems to protect investors and help prevent breaches of the law.

The Australian Securities and Investment Commission (ASIC) is the statutory authority responsible for regulating the activities of managed funds. ASIC was involved in the establishment of an external complaints resolution scheme to protect the rights of investors, and all fund managers are required by ASIC to register for the scheme as part of their licensing process.

Managed funds are divided up into 'units' of equal value. Like an ordinary share, they give you a part-ownership of assets. Although shares and units are technically quite different, the concept is the same and some units - those of 'listed trusts' - are traded on the Australian Stock Exchange.

The number of units issued for sale in some funds is fixed, whereas in other funds new units are always available to anyone who wants to buy them. In general, listed unit trusts are 'closed', meaning the fund has a fixed number of issued units. This number of units can only be increased by a separate offering of new units at a later date.

Unlisted trusts (those not listed on the Australian Stock Exchange) can be either 'open' or closed. An 'open' unlisted unit trust that wants to continue issuing units to the public simply does so by updating its prospectus every six months or so. Managed funds such as superannuation and insurance or friendly society bonds are nearly always open - you can increase your stakeholding in them by as much as you like at any time.

With the exception of listed trusts' units, which are valued (priced) on the share market, other managed funds value their units (put a price on them) daily or, at least, weekly. The method of valuation must be done strictly in accordance with the rules laid out in Trust Deed (where one exists). Actually, two values per unit are calculated - a value for buying units and another for selling them.

The buying price of a unit is determined by taking the current valuation of the fund's total assets, adding a loading to cover purchase costs like stamp duties and brokerage, and then dividing this amount by the number of issued units. The selling price is calculated similarly - by taking the current valuation of the fund's total assets, adding a loading to cover selling costs, and then dividing this amount by the number of units on issue. The difference between the two prices can be as high as 6%, which reflects these costs as well as commissions payable to a licensed adviser.

Let's look at a very simple illustration of how changes in a unit's value affect you. You invest $10,000 in an unlisted managed trust with units selling for $1; this buys you 10,000 units.

Now, remembering that the value of units fluctuates in line with the value of the funds underlying assets, if you later wished to redeem 2,000 of these units and the unit price had risen to $1.10 (because the value of the fund's assets had risen), you'd get back $2,200, representing a profit of 10%.

Managed fund units vary significantly in their liquidity. You can get your money out of cash management funds more or less immediately. Converting your units in an insurance bond to cash may take a few days, and redeeming share trust units may take up to two weeks - which is about the maximum it should take under normal circumstances to cash any type of unit. Having said this, real problems with liquidity have occurred with property trusts in the past, due to the relative lack of liquidity of their underlying property assets in tough market times.

There are potentially two main ways of buying units and two main ways of redeeming them. When a managed fund is listed its units can be bought and sold through a stockbroker at a price set by the market, just like shares. The mood of the market will determine just how quickly a buyer or seller is found for a particular fund's units but, under normal circumstances, a transaction should take place almost instantly.

If the managed fund is unlisted, you can normally only buy and redeem units directly from the fund manager. There is no other simple method of trading units in an unlisted fund and, more to the point, there is no other simple method of cashing them. This is why you need to ensure the fund manager or managers you invest with are reputable and competent and therefore likely to keep their doors open.

Note that like other securities you can trade units directly between individuals, bypassing stockbrokers and fund managers, though this type of trading is uncommon.