Benefits and risks of investing in LICs and LITs

LICs and LICs provide easy access to a professionally managed portfolio of securities. There are specific risks to be aware of when investing.

Benefits of investing in LICs and LITs

A LIC or a LIT provides the ability to gain exposure to a professionally managed, diversified portfolio of securities, an asset class or a market sector in one transaction.

Like any investment, LICs and LITs have risks you need to understand. You should seek independent advice from a professional adviser before investing.

LICs and LITs can help you diversify your portfolio across asset classes, sectors and geographies that otherwise could be difficult to access. For example, there are LICs & LITs that cover international shares, emerging markets, specific sectors, corporate bonds, government and semi-government bonds and commodities.

For example, if your portfolio is comprised primarily of Australian shares, you can easily diversify your portfolio by adding a LIC or LIT that covers international shares.

Experienced professional investment managers actively manage the portfolio with the aim of generating above market returns.

Expert investment management aims to deliver a better performance than the market. Investing in a LIC or LIT gives you exposure to the wider range of styles and strategies used by professional managers – including investment capabilities from around the world. You can also access investments where it is difficult for individual investors to gain research insights, such as small caps, alternative assets, fixed income and emerging markets.

As LICs and LITs are close-ended managed funds, they issue a fixed number of shares or units on initial public offering (IPO) and investors buy and sell those shares or units on ASX.

A benefit of a closed-ended structure is that it allows the fund manager to focus on long term investment objectives, rather than manage daily cashflows generated by investors seeking to buy and sell their holdings. A further benefit is that there isn’t the risk that the asset quality of the fund could dilute in the event the fund becomes popular.

It is possible to change the number of shares or units on issue. LICs and LITs can issue new shares or units to increase the number on issue, or conversely, it can cancel or buy-back shares or units to reduce the number of shares or units on issue.

Risks of trading LICs and LITs

Trading in LICs and LITs carries specific risks to be aware of before investing.

LICs and LITs often trade at a premium or discount to the value of their underlying assets.

The value of a LIC’s shares or a LIT’s units is usually referred to as the fund’s net tangible assets (NTA). A fund’s performance is usually assessed on a combination of the performance of the underlying investments and the market premium or discount to the fund itself.

The on-market price of an LIC or LIT is closely related to its NTA, but can be impacted by a number of factors, independent of the NTA, such as investor sentiment and market cycles. There are a range of reasons why a LIC or LIT may trade at a premium such as market perceptions of sound management. If you decide to pay a premium, it is important to have reasons for doing so.

When a LIC or LIT trades at a discount, it could be due to poor performance, market concerns about management, low liquidity or other factors. When your LIC or LIT trades at a substantial discount, it can be difficult for you to sell your holding for a price that you would like.

The ASX requires LICs and LITs to publish their NTA within 14 days from month’s end.

Certain countries or regions may be subject to additional degrees of market volatility, or economic and political instability. This may reduce or preclude the ability to trade securities or negatively impact a security’s value.

Currency risk is a consideration when investing globally. A weak Australian dollar will increase the value of investments held in non-Australian dollars. On the other hand, if the Australian dollar rises, the value of investments held in non-Australian dollars will fall; all other factors being equal.

Some funds may also carry additional risks, depending on the strategy they use or the assets they invest in. For example, some funds may use borrowing or leverage, which may increase risk. To understand fund-specific risks, read the prospectus or product disclosure statement and seek independent advice from a professional adviser before investing.

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