Listed investment companies (LICs) and listed investment trusts (LITs) offer exposure to a broader range of assets per transaction.
The investing approach and underlying assets will vary. So make sure you understand how the company or trust is investing your money.
How LICs and LITs work
Listed investment companies (LICs)
A LIC is an investment, listed on an exchange such as the Australian Securities Exchange (ASX). It is incorporated as a company.
Many LICs operate like a managed fund. They have an external or internal fund manager, who selects and manages the company's investments.
LICs are 'closed-ended'. This means they don't issue new shares, or cancel existing shares, as investors join or leave. Instead, they issue a fixed number of shares in an initial public offering (IPO). Investors then buy and sell those shares on the exchange.
This allows a fund manager to focus on investing, without having to worry about cash flow.
As LICs are companies, they may pay franked dividends.
Listed investment trusts (LITs)
A LIT is an investment listed on an exchange such as ASX, incorporated as a trust.
LITs are also closed-ended funds. So investors buy and sell units on the exchange.
LITs pay out any surplus income to investors as trust distributions, according to the underlying investments. Franking levels may vary, depending on the income distributed from the underlying assets.
Check the underlying investments
Older LICs and LITs typically invest in either Australian or international shares. Newer funds offer exposure to a broader range of underlying assets, to suit different types of investors.
Categories of LICs and LITs
Based on their investment style, LICs and LITs sit in four broad categories:
- Australian shares funds — invest mostly in listed Australian shares
- International shares funds — invest mostly in shares listed on overseas exchanges
- Private equity funds — invest in unlisted companies, locally or overseas
- Specialist funds — invest in special assets or particular sectors such as wineries, technology companies, infrastructure or property
Investment strategies
The investment approach of each fund varies, from conservative to aggressive.
While aggressive funds may generate higher returns, they can also be higher risk. Some of the riskier strategies funds may use include short selling, leverage and derivatives.
Consider whether the fund's structure, investing style and underlying portfolio suits your needs and objectives before you invest.
Investment time frame
This type of investment suits a medium to long-term time frame (5 years or more). This is because of the potential for volatility of the underlying assets.
How to buy and sell LICs and LITs
You can buy or sell LICs and LITs on ASX, through a broker or online trading account. So, as with ordinary shares, you pay a broking fee when you buy or sell.
See how to buy and sell shares for more information.
Net tangible asset (NTA) backing
LICs and LITs usually trade at either a discount or premium to their net tangible asset (NTA) backing.
The NTA is a company's physical assets, less its liabilities. This means a share may trade at more or less than the value of the underlying assets per share. Long established funds, with a history of good investment management, often trade at a premium. Newer funds are more likely to trade at a discount.
Management and performance fees
Fees paid to the fund manager may include:
- a management fee (commonly 1-1.5% of net assets)
- a performance fee (commonly 15-20% of returns above a set benchmark)
Management fees are payable regardless of how well the fund performs.
Some funds don't charge a performance fee. On others, the performance fee may be payable even if the fund makes a negative return. As long as the return is above the benchmark.
Get advice if you need it
LICs and LITs vary in risk and complexity. Talk to a financial adviser if you need help deciding if this investment is right for you.
