How do LICs work?
An LIC is a company on the share market whose business is to invest in other companies on the share market, and grow their share portfolio. By investing in LICs you’ll have a team that actively manages your money and the value of the LIC is reflected in how successful the company is at investing.
Generally, LICs will look for the companies that meet a specific mandate based on an array of things, like dividend yield. Therefore, each one will invest in different assets and have different strategies. For example, one of the most renowned LICs is Warren Buffet’s Berkshire Hathaway which is likely to take the value investing approach when it comes to deciding on shares to buy.
LICs vs. ETFs
LICs are similar to exchange traded funds (ETFs) in many ways. They are both investment funds that can be bought and sold on the share market. However, LICs offer shares to investors whereas ETFs issue units. Another key difference is LICs are only ever actively managed, ETFs, on the other hand, are offered as both as a passive and an active investment.
Related articles: Active vs. Passive Investing – What’s the difference?
What are the pros and cons of investing in LICs?
There are a few advantages to investing in LICs. They tend to be a low-cost option, with the fees generally less than what you’d encounter with a managed fund. LICs also tends to offer an easy point of access to a diverse range of products, as well as a variety of investment strategies. Income investors can also find LICs that offer dividends and typically they make reinvesting your dividends relatively easy – allowing you to make the most of compound interest.
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On the flipside, there are a number of downsides to consider as well. Investor should be aware that LICs don’t tend to show huge growth in a short amount of time. Generally, they are best treated as long term-investments. There is also market risk to consider. As LICs tend to mirror the stock market, when the market is down generally LICs will be too. Sometimes, liquidity is another issues investors face with LICs. As LICs don’t have a market maker, (a firm or individual who buys and sells particular securities to ensure liquidity and maintain fairness in the market) before an investor can sell their LIC they have to wait for a buyer and vice versa if they were looking to buy.
Related article: 4 Financial Risks Investors Should Be Aware Of
How to buy LICs
Just like ordinary shares, you can buy or sell LICs on the ASX, through a broker or an online share trader.
Before you invest
Before making an investment, it’s important to thoroughly research and understand what you’re investing in. Take the time to properly read the key paperwork, such as the PDS and annual reports. Keeping up-to-date with investment news may also be helpful, as a good investment today may not be so in the future.