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Listed investment companies (LICs) and listed investment trusts (LITs) pool investors' money to buy investments.
How LICs and LITs work
Listed investment companies (LICs)
Listed investment companies (LICs) and listed investment trusts (LITs) are a type of managed fund that can be bought and sold on a stock exchange. You buy shares in a LIC and units in a LIT. Like unlisted managed funds, they pool money from many investors. A professional investment manager chooses and manages the investments.
Your return depends on changes in the price of your shares or units and any payments you receive. These payments are called dividends for LICs and distributions for LITs. Fees and tax also affect your return.
LICs and LITs are closed-ended investments. This means investors usually buy and sell existing shares or units on an exchange (for example, the ASX).
LICs and LITs can still raise more money by issuing additional shares or units. They may also buy back existing shares or units.
This structure gives the fund manager a relatively stable pool of money to manage because the company or trust does not need to sell investments to repay an investor who sells their shares or units on the exchange.
LICs and LITs are not the same as an exchange-traded fund (ETF). Find out more about ETFs here.
What LICs and LITs invest in
LICs and LITs can invest in many different assets and markets, depending on their investment strategy.
These may include Australian and overseas shares, bonds, property, commodities and investments that are not traded on a securities exchange, such as private company shares and privately negotiated loans.
Risks and returns depend on what the company or trust invests in and how those investments are managed.
Net tangible asset (NTA) backing
LICs and LITs both publicly report their net tangible asset (NTA) backing.
NTA is the value of assets after subtracting debts, other liabilities and intangible assets. This amount is divided by the number of shares or units.
Shares/units may trade at more than (a premium) or less than (a discount) the value of the underlying assets per share.
When deciding whether to invest, compare the market price with the latest reported NTA per share or unit. Check the valuation date and whether the figure is before or after tax. Consider why the investment might be trading at a premium or discount.
How companies and trusts differ
Listed investment companies (LICs)
LICs are companies. Investors are shareholders in the company.
The company structure affects how LICs operate:
- LICs generally pay company tax on taxable profits from their investments
- LICs may pay franked dividends, which come with franking credits for Australian company tax already paid.
- The LIC’s board decides whether to pay a dividend and how much to pay.
- LICs can keep some profits after tax and use them to pay for dividends in later years. This may help provide shareholders with a more consistent payments, but dividends are not guaranteed.
Listed investment trusts (LITs)
LITs are trusts. A trust is a legal arrangement in which assets are held for investors’ benefit. Investors buy units in the trust and are called unitholders or members.
The trust structure affects how LITs operate:
- Generally, unitholders are taxed on their share of the trust’s taxable income, including capital gains, instead of the trust paying tax itself.
- The amount you need to report for tax can differ from the cash you receive. You may have tax to pay even if you receive no cash payment, depending on the trust’s tax position and your circumstances. Use the trust’s annual tax statement to complete your tax return
- If the trust receives franked dividends from its investments, it may pass the associated franking credits on to eligible unitholders.
Potential benefits of LICs and LITs
Like other managed funds and exchange-traded funds (ETFs), LICs and LITs can give you access to a wide range of investments without making every investing decision yourself.
Benefits can include:
- access to multiple investments, including investments that may be hard to access otherwise, in one product
- professional management
- diversification, which means spreading your money across different investments. How much diversification you get depends on what the LIC or LIT holds. A fund focused on one industry or a small number of investments may offer limited diversification.
Risks of LICs and LITs
Like all investments, LICs and LITs come with risks. The value of your investment may fall and you may get back less than you put in.
Two risks to understand are the price you may receive when selling and whether you can find a buyer:
- premium and discount risk: your shares or units can fall in price even if the value of the investments held stays the same. This can happen if a premium shrinks or a discount grows
- liquidity risk: you may not be able to sell your shares or units quickly, or at an acceptable price, because there are too few buyers
LICs and LITs also carry many of the same risks as managed funds and ETFs. Depending on the investment strategy, these risks may include:
- market risk: the assets in the fund can fall in value because of events affecting the entire market
- concentration risk: losses can have a greater impact if the portfolio holds only a few investments or focuses heavily on one industry, country or type of investment
- currency risk: overseas investments can be affected by changes in exchange rates
- inflation risk: your returns may not keep up with rising prices, so your money buys less over time
- interest rate risk: changes in interest rates can affect the value of investments, especially bonds and other loans
- credit risk: a borrower may fail to pay interest or repay some or all of the money owed on a loan or bond held in the portfolio
- manager risk: the fund manager may make poor decisions or fail to meet the fund’s investment objectives
- borrowing (gearing) risk: if the company or trust borrows to invest, borrowing can increase both gains and losses. Interest and other borrowing costs also reduce returns
- valuation risk: some investments, especially those that are not regularly traded, can be difficult to value. Their reported value may differ from the price they could actually sell for.
How to buy and sell LICs and LITs
You can buy or sell shares in LICs and units in LITs on an exchange, such as the ASX, through a broker or online trading account. You usually pay a trading fee, called brokerage, when you buy or sell.
See how to buy and sell shares for more information.
Before you invest, make sure you:
- Read the available disclosure documents, such as a prospectus for a LIC or a product disclosure statement (PDS) for a LIT. These explain the investment, its risks and costs. Also read the latest annual report, investment updates and ASX announcements. An older offer document may not reflect the investment as it operates today.
- Compare the market price with the latest reported NTA per share or unit. Check the valuation date and whether the figure is before or after tax. Understand the underlying investments and consider why the investment trades at a premium or discount.
- Check the fund manager’s experience, past performance and investment strategy, including any limits on what they can invest in. Past performance does not guarantee future returns
- Understand the ongoing fees and costs, including any management or performance fees, and how they are calculated.