Managed funds are a simple way to start an investment portfolio. You don’t need much money to start and you can build up your investments and spread your money across a range of assets. You rely on the expertise of the fund manager to select assets and decide when to buy and sell them.
But there are other collective investments where investors pool their money. One example is Listed Investment Companies (LICs). This is simply a company listed on the Australian Securities Exchange (ASX) that is in the business of investing. It buys assets for income and potential growth and distributes profits to its shareholders. The oldest such company in Australia has been operating since 1938 and many others have performance histories of over 20 years.
The following table compares the two.
| LICs | Managed Funds | |
| Structure | Assets held by a company. | Assets held in a trust. |
| Tax | Paid by the company at 30%. | Income and capital gains passed to the investor and taxed at their marginal tax rate. |
| Dividends | Fully franked. | Franking level depends on the assets held. |
| Buying / selling the investment | Like any company share, you can only buy or sell a share in a LIC via the ASX. Price is set by supply and demand. | You can buy and sell units in the trust at any time. Unit price will reflect the value of the underlying assets. |
| Regular investing/savings program | Don’t offer a regular savings program. To save money on brokerage it’s best to buy larger tranches of shares. | Once the minimum investment is made, purchase of units can be made through regular contributions to the fund. |
| Assets | Invest in a wide portfolio of assets including Australian and international shares, fixed interest and property. | Invest in a wide portfolio of assets including Australian and international shares, fixed interest and property. |
| Target returns | Usually strive to achieve stable and growing income for investors with some capital gain. LICs adopt a “buy and hold” strategy. | Usually strive to achieve a benchmark return (eg. ASX200). May actively trade to improve returns. |
| Cost structure | Often lower than managed funds because they trade less often and do not use a distribution system. | There is an administration fee to cover the costs of the ongoing management and reporting. Investors pay fees when they switch between investments. |
There is no right or wrong answer when selecting an appropriate investment.
Talk to us if you would like to know more about LICs.