What Are Geared Investment Funds?*

*And Why Borrowing for Shares Isn’t “Riskier” Than Borrowing for Property

Many Australians are comfortable borrowing hundreds of thousands of dollars to buy an investment property. Yet the idea of borrowing to invest in shares often feels “too risky”. Some even believe they could “lose everything” if they use gearing with shares.

This is a myth — and an important one to unpack. Borrowing to invest always involves risk, but gearing into shares doesn’t inherently carry more risk than gearing into property. In fact, in some ways the risks are more controlled and transparent.

Let’s break this down in plain language.

What Does “Gearing” Mean?

Gearing simply means using borrowed money to invest.

• When you take out a mortgage to buy an investment property, you are gearing.
• When you use a margin loan or invest in an internally geared managed fund, you are also gearing.

Gearing amplifies outcomes:

• If the investment rises, gains are magnified.
• If it falls, losses are magnified.

A useful illustration is comparing gearing to adding an engine to a bike: the engine (borrowed money) can speed you up, but you still need to steer carefully.

What Are Internally Geared Managed Funds?

A geared managed fund is simply a fund that:

• invests in a basket of shares (e.g., Australian equities), and
• uses responsible levels of borrowing inside the fund to increase exposure.

For example, the Betashares Wealth Builder Diversified All Growth Geared (30-40% LVR) Complex ETF (ASX: GHHF), invests in Australian and global shares and uses borrowed money within the fund to boost long-term returns.

You are not personally taking out a loan, and you can’t lose more than your investment. On the other hand, if you used your home as security and borrowed 100% of the investment property’s value, and that property later fell in value, you could end up owing the bank more than the property is worth. If you then chose to sell, you would need to cover the shortfall between the sale price and the outstanding loan.

This alone is a key psychological advantage over property gearing.

Property vs Geared Share Funds: Clearing Up the Myths

Myth: “Borrowing for shares is riskier than borrowing for property.”

Reality:
Both involve risk — but the risks are simply different.
Borrowing $600,000 for an investment property exposes you to:

• higher concentration risk (one property, one location, one tenant),
• large fixed costs (repairs, insurance, rates),
• higher interest costs,
• long-term illiquidity (you can’t sell a bedroom to raise cash).

By contrast, geared funds:

• spread your money across dozens or hundreds of companies,
• have no personal loan,
• are liquid (you can sell any day),
• have built-in risk controls through the manager.

Let’s compare the two directly.

Pros & Cons: Geared Property vs Geared Share Funds

1. Borrowing Structure

Investment Property

• You personally take out a large loan.
• You are liable if things go wrong.
• The bank can request additional security.
• You carry the full “tail risk”.

Geared Managed Fund

• The fund itself borrows — not you.
• Your maximum loss is capped at your investment.
• No margin calls, no banks calling you.
• The manager handles risk and debt.

Advantage: geared funds have lower personal financial risk.

2. Diversification

Property

• Usually one asset in one suburb.
• Tenant issues, vacancy, local price downturns can hit hard.

Geared Fund

• Instantly diversified across dozens of companies, industries and sectors.
• No tenant or maintenance risk.

Advantage: geared funds dramatically reduce concentration risk.

3. Liquidity (ability to access money)

Property

• Can take months to sell.
• Transaction costs (stamp duty, agent fees) are high.

Geared Fund

• Buy or sell on the ASX any business day.
• Low transaction costs.

Advantage: geared funds give far more flexibility.

4. Transparency & Costs

Property

• Costs can surprise you: repairs, strata, insurance, interest, vacancies.
• Valuations move slowly, masking real volatility.

Geared Fund

• Performance is transparent daily.
• Costs are disclosed upfront.

Advantage: geared funds are simpler and more predictable to run.

5. Performance Potential

Both can grow wealth over time, but historically:

• Australian shares have returned ~9–10% p.a. long term.
• Australian property has returned capital growth ~6–7% p.a. plus rent.

Add gearing, and returns magnify in both cases.

Funds like Betashares GHHF have shown strong long-term performance, thanks to market returns plus responsible gearing. But performance can be more volatile in the short term — which is normal and expected.

So Which Is “Safer”?

The key question isn’t “Which is riskier?”
It’s “Which risks do I want to take — and how are they managed?”

Property gearing risks

• Large personal debt
• Concentration risk
• Illiquidity
• Market risk
• Renovation/maintenance risk

Geared fund risks

• Higher short-term market volatility
• Magnified sharemarket movements
• Requires long-term focus

But importantly:

With geared share funds, you can never lose more than what you invested — unlike property debt.

Why Clients Often Feel More Comfortable With Property

This is mostly behavioural:

1. Property feels familiar – we grew up around it.
2. Banks “approve” it by lending large amounts.
3. You can touch it — it feels tangible.
4. The price doesn’t update every day, so volatility is hidden.
5. Everyone talks about it, so it feels less risky.

The reality is simply that property masks risk — shares display it.

Which Approach Is Right for You?

Borrowing to invest can be a powerful long-term wealth strategy whether done through:

• an investment property,
• a margin loan, or
• an internally geared fund like those offered by Betashares and others.

But the best approach depends on:

• your goals,
• your comfort with volatility,
• your time horizon, and
• whether you want to handle personal debt.

For many investors, internally geared funds offer a more flexible, transparent and lower-stress way to use gearing compared with taking on a large property loan.

Next Steps

To find out more about how a financial adviser can help, speak to us to get you moving in the right direction.

Important information and disclaimer

The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide.

FinPeak Advisers ABN 20 412 206 738 is a Corporate Authorised Representative No. 1249766 of Spark Advisers Australia Pty Ltd ABN 34 122 486 935 AFSL No. 458254 (a subsidiary of Spark FG ABN 15 621 553 786)