Geared equity funds aim to boost exposure to Australian shares using borrowed money. When markets rise, gains can outpace the index. When markets fall, losses bite harder. This tradeoff can work for disciplined investors. It can also punish anyone who sizes too big or ignores costs. The idea is simple: use prudent leverage, pair it with rules, and let compounding work. The practice needs care, patience, and a clear plan.
How gearing changes returns
Gearing lifts your exposure above your cash investment. A 1% market rise can become more than 1% in your unit price. The reverse also holds, so setbacks cut deeper. Understand the target leverage range and how the manager keeps it in band.
In addition, read how the fund handles big gaps at the open. If you are researching options like Gear ASX, start with simple scenarios. Map what a 10% rally or a 10% drop could do to your position.
The real cost of borrowed exposure
Interest costs reduce net returns. Management fees and transaction costs also add to the drag.Higher cash rates raise the hurdle you must clear to break even. Ask how the fund sources and prices its financing. Check whether it pays distributions that might include realized gains. Reinvesting can help, but taxes still matter. Build a rough breakeven rate in your notes. Know what happens to performance if rates stay high for a year.
Volatility, sequence risk, and entry timing
Leverage multiplies volatility. Big swings feel larger but can push you off plan. Sequence risk matters because early losses compound when exposure is geared. Start with a phased entry. Make small, scheduled buys to build discipline. Set a hard cap on position size before you begin, and keep near-term cash needs out of geared funds. Use price and drawdown alerts so spikes do not trigger snap decisions.
Rebalancing rules that protect gains
Have rules for trimming after strong runs. Simple bands work; for example, cut back if the position grows beyond a set share of your equity sleeve. You should only add when the allocation falls below your floor. Some managers reset leverage after moves, which helps control drift, and others let exposure float. Read the method and plan around it. A steady process reduces overtrading and helps compounding show up over time.
Portfolio fit and practical guardrails
Use geared funds as a satellite position, not your core. Anchor the core with broad, low-cost equity. Set a cap for total geared exposure and review it each quarter. You should also keep emergency cash and near-term goals outside of leverage.
Additionally, write exit rules before you buy, including the price or signal that triggers a cut. Be sure to track results after fees against a plain equity index. If the edge slips or your behavior wobbles, reduce the weight or pause contributions.
Endnote
Gearing is a tool, not a shortcut. It can amplify well-chosen exposure to ASX leaders, and it can magnify mistakes. Costs, volatility, and behavior decide most outcomes. Start small, keep records, and follow rules you can live with. With this approach, a geared sleeve can earn its place beside a steady core.
