Accessing equities in two easy steps.

As the shaky dot.coms and booming biotech stocks of last year become just a painful memory investors are questioning the best method to invest in equities. Kate Kachor compares the approaches of direct investment against managed funds.

As Australian investors are becoming more savvy to the ways of the share markets, the push to get them into managed funds or direct shares has eased.

Gone are the days when young would-be investors considered making future wealth at the races or on the pokie machines in the local watering hole.

These days investors are seeking the help of investment professionals or seeking independent wealth online researching, buying and selling stocks online till three in the morning, hoping to crack the market.

However, finding the right investment method is probably one of the hardest picks for many of these investors.

"If someone believes that they can beat the professional investment management team they are fooling themselves," says MLC investment management general manager Chris Condon.

"Even in the case of someone who has the money sitting in the bank, there are conservative managed funds that should, over time, do better than just leaving that money in the bank," he says.

A self-confessed investment professional, Condon says first time investors should take strong consideration before entering into either a managed fund or direct shares.

Although he is in favour of managed funds, Condon believes many investors do not understand the risk involved when entering the share market.

He says people are constantly guided by the misconception that they understand risk. According to Condon, risk is something most lay people aren't trained in and leads to many investors finding themselves in high risk positions that they believed were quite safe.

"For an investor to invest in a small number of blue chip companies and put them in the bottom draw is dangerous," he says. "These types of portfolios only have a small number of stocks and the concept of a blue chip company does not actually translate into good value."

Fellow investment professional, AMP Henderson Global Investors Australian equities senior investment adviser Neil Franklin says managed funds are a definite pathway for investors.

Franklin, who has the added experience of more than 20 years experience as a stockbroker, says managed funds provide investors with full time professional service as well as professional portfolio construction and diversification.

At the same time Franklin says they also tap into a wide range of financial knowledge where as direct shares offers investors more of a gamble, since none of the support of managed funds is there.

"Fund managers have wider access to the markets. A fund manager provides full time professional advice as well as access to companies that you probably would not find if you were trading the market yourself," he says.

On the other side of the coin, Brett Baker from Australian Stock Exchange (ASX) who is charged with developing the relationship between the ASX and the financial planning industry, says direct shares are cost effective for many investors.

Baker says investors pay a 'one off' brokerage fee rather than paying an entry fee, an exit fee or an on-going management fee which are standard for most managed equity funds.

"Investors have control of their funds and can receive 'individual' advice from their adviser while also getting the full benefit of franked dividends," Baker says.

"The investor's control is important in that he or she can choose how widely and how often to invest in any particular product; with the important caveat that they are undertaking responsibility for the performance of the portfolio."

Macquarie Bank Equities associate director Lucinda Chan says direct shares also give investors greater flexibility.

Chan says an investor who uses direct shares, such as trading online, gains exclusive flexibility and lowers the costs associated with investing.

She says through direct shares investors are completely in control of their portfolio and finances.

"By an investor using direct shares it gives them more time to do other things, and their financial planner can help the investor manage the books. Unlike a managed fund, direct share investments have a low cost and allow for greater flexibility," Chan says.

Despite equal though different level of benefits for investors through both managed funds and direct shares, the disadvantages are the telling factor.

On the managed funds side Condon and Franklin attribute tax and the effect capital gains has on tax as being a major disadvantage to using managed funds. Baker and Chan say excess paper trails are the downfall to direct shares.

"Disadvantage issues usually relate to the way tax is treated. If you buy a share yourself you know where you bought them and what the cost base for the capital gains tax (CGT) is," Condon says.

"However, CGT can also be an advantage. People coming in and out of the fund create a cash flow. The cash flow enables managers to buy and sell stocks for the investor," he says.

According to Condon, investors also need to realise there is an entire world market available to investors, not just the local Australian market.

He says it has typically become a pattern for Australian investors to invest solely in the local market and if a portfolio is limited in this way the investor could miss out on investing in an important industry only available overseas.

Chan says the main disadvantage investors find is through their own lack of investment knowledge. She says there are too many prospective investors leaping into the deep end before looking.

"Too many people have the misconception that investing through direct shares is easy. Many people start playing and trading without knowing how it works," she says.

While brokers and financial advisers generally provide book keeping services for clients, Baker says private investors are required to do some additional paper work to provide information to the tax office, thus also taking on the responsibility for that side of investing.

Given that investing isn't as easy as the Web makes it seems is there a particular investor that is better suited to accessing equities through managed funds or directly? The commentators are unanimous in saying, not at all.

Each of them also believe consultation with financial planner or stockbroker would be a good idea for people with a keen interest in equities investing.

Yet despite the abundance of investment information and education, most agree the issue is still one of personal choice when choosing between managed funds and direct shares.

Franklin believes managed funds can be spread across a range of investors and on a broad level or strongly focused on a sector making "these funds suitable for just about anybody."

Baker says in regards to direct shares there is no one type of investor. He says so many Australians have entered the market in the past few years, for different reasons and by different ways that it is difficult to single out a characteristic in common.

"Clearly the large-scale privitisations and demutualisations of recent years have been a major factor, but there are many others," he says.

He also says that these investors also share with others the idea that investment is not for the short term.

"Those investors who bought shares in those household name companies have generally enjoyed significant returns on their investment. Even when those companies have suffered short term difficulties, investors appear to have held rather than sold their holdings."