Investing can be complex, especially when it comes to choosing the right vehicle for your money. Among the options available, managed funds and listed investment companies (LICs) are popular choices for Australian investors. But how do they compare?

In this article, we’ll break down what managed funds and LICs are, how they work, and what you need to consider when deciding between them. Our aim is to help you understand these two investment options and make more informed decisions to build your portfolio.

What are managed funds?

Managed funds pool money from many investors to buy a range of assets. These assets might include shares , bonds , or property . A professional investment manager oversees the fund, deciding what to buy and sell. Managed funds come in different types, such as actively managed or passive funds, and can be open-ended, meaning investors can buy or sell units in the fund at any time.

How managed funds work

In a managed fund, the fund manager selects and manages the investments based on the fund’s strategy. Investors buy units in the fund, and the value of these units rises or falls depending on the performance of the underlying assets. Managed funds usually charge a fee for this service, which is typically a percentage of the fund's value. This fee covers the cost of managing the fund and is deducted from the fund’s returns.

Potential pros and cons of investing in managed funds

Managed funds offer investors several prospective benefits:

• Professional management: Managed funds are overseen by professional managers, which can be beneficial if you lack the time or expertise to manage investments yourself.
• Diversification : Your money is spread across various assets, potentially reducing risk compared to investing in a single asset.
• Accessibility: Many managed funds have relatively low minimum investment amounts, making them accessible to more investors.

However, there are some downsides to consider before investing:

• Higher fees: Managed funds often charge higher fees compared to other investment options, which can reduce your returns over time.
• Performance variability: Not all managed funds perform well, and there’s no guarantee that a fund will outperform the market. But, risk comes with any investment.
• Limited control: As the fund manager makes the investment decisions, you have less control over the individual assets within the fund.

What are listed investment companies (LICs)?

Listed investment companies (LICs) are publicly listed companies that invest in a portfolio of assets, similar to managed funds. They trade on the stock exchange (e.g. Australian Securities Exchange ) like any other listed company shares. Investors buy shares in the LIC and the value can go up or down based on the performance of the underlying assets and market demand.

How LICs work

LICs have a fixed number of shares – known as a closed-ended structure. This means the company doesn’t issue or cancel shares based on investor demand. Instead, investors buy and sell shares on the stock market. LICs are managed by an investment team or board, who make decisions about the company’s investments. Like managed funds, they usually charge management fees.

Potential pros and cons of investing in LICs

Here are some key prospective advantages of LICs to consider:

• Potentially lower fees: LICs typically have lower management fees compared to managed funds, which can potentially be more cost-effective for investors.
• Transparency: LICs are listed on the stock exchange, so their prices and performance are easy to track. You can see the share price and net tangible assets (NTA) value regularly. Net tangible assets refer to the value of a company's physical assets after subtracting its liabilities and intangible assets.
• Ease of trading: LIC shares can be bought and sold on the stock exchange, providing flexibility and liquidity for investors.

While LICs have their benefits, there are also some potential drawbacks:

• Market price fluctuations: The share price of an LIC can differ from the value of its underlying assets (NTA), leading to premiums or discounts that may impact returns.
• Limited control: Like managed funds, you have little control over the individual investments within the LIC, as the management team makes these decisions.
• Liquidity concerns: Smaller LICs may have lower trading volumes, potentially making it harder to buy or sell shares quickly.

What’s the key difference between a managed fund and LIC?

When comparing managed funds and LICs, you’ll notice several similarities. It's essential, therefore, to also understand their key differences. These differences can impact your investment experience and outcomes. The table below outlines the main contrasts between the two options.

Feature	Managed funds	Listed investment companies (LICs)
Structure	Open-ended; units can be bought or sold anytime	Closed-ended; fixed number of shares
Liquidity	Highly liquid; units bought/sold through the fund	Liquidity depends on market demand; traded on the stock exchange
Fees	Typically higher fees, including management fees	Generally lower fees; potential for lower ongoing costs
Control	Limited control over individual investments	Limited control; decisions made by the LIC’s board
Market pricing	Priced at net asset value (NAV)	Share price can differ from NTA
Transparency	NAV is reported regularly, but less frequent updates	Daily price visibility; regular NTA updates
Tax efficiency	Distributions taxed based on the fund’s activity	Dividends often come with franking credits

Each option has its set of features, which might align differently with your investment goals and preferences. Next, we’ll explore how to choose between managed funds and LICs based on your needs.

How to choose between managed funds and LICs

Choosing between investing in a managed fund or LIC depends on your personal investment goals, risk tolerance , and preferences. Here are some factors to consider when making your decision.

Investor goals and preferences

Start by considering your investment objectives. If you're looking for growth, income, or a mix of both, this will influence your choice. Managed funds may offer a broader range of options, including more specialised strategies. LICs might be more appealing if you prefer a more straightforward, long-term investing approach with potential for regular dividends .

Performance history and management

Review the performance history of the specific managed funds or LICs you are considering. Look at how they have performed over different market conditions. As you do, keep in mind that past performance isn’t always a reliable indicator of future results. It’s also worth examining the experience and track record of the fund managers or LIC management teams. A strong management team can make a real impact on the performance of your investment.

Tax implications

Consider the tax treatment of each option. Managed funds distribute income, which can include interest, dividends, and realised capital gains , all of which may have different tax implications. LICs often pay dividends that may come with franking credits , which could be beneficial depending on your tax situation. It’s important to understand how each option aligns with your tax planning. Also keep in mind that this overview is general in nature; for tailored advice on tax, speak to a registered accountant.

Market environment

The current market environment can also influence your decision. In times of market volatility, the closed-ended nature of LICs might result in their shares trading at a discount to their NTA. Managed funds, on the other hand, might potentially offer more stability in pricing due to their open-ended structure.

Accessibility and convenience

Also consider how easily you’d like to access and manage these investments. Managed funds often allow for regular contributions and withdrawals, which can be convenient for dollar-cost averaging . LICs, being traded on the stock exchange, offer the flexibility to buy or sell shares at any time – this depends on market liquidity.

Choosing the right investment vehicle is a personal decision that depends on various factors. By carefully considering these factors, you can make a choice that aligns with your investment objectives.

Long-term investing with managed funds and LICs

Either a managed fund or an LIC can play a role in a long-term investing strategy, depending on your goals and preferences.

Investing in managed funds

As mentioned earlier, managed funds offer diversification and professional management, which can be beneficial for long-term growth. By spreading your investment across various assets, managed funds can potentially help reduce risk over time. This can be particularly useful if you plan to make regular contributions and take advantage of dollar-cost averaging. Managed funds can also be tailored to different strategies, such as focusing on growth, income, or a mix of both, which can align with different stages of your investing journey.

Let’s look at a fictional example. Camila wants to build a long-term investment portfolio but doesn't have the time to manage individual investments. Camila decides to invest in a managed fund that focuses on growth assets like shares. She likes the idea of professional management and the diversification that a managed fund provides.

Camila contributes a fixed amount every month, taking advantage of dollar-cost averaging. She appreciates that the fund manager adjusts the portfolio based on market conditions, which gives her peace of mind. Sarah knows that the fund’s performance isn’t guaranteed, but she feels confident in her choice because it aligns with her long-term goal of growing her wealth.

Disclaimer: Camila understands that the value of her investment can fluctuate, and past performance is not an indicator of future results.

Investing in LICs

LICs can potentially complement a long-term strategy by providing exposure to a consistent investment approach and potential income through dividends. LICs are often focused on preserving and growing capital over time, which can suit investors looking for a stable, long-term option. The closed-ended structure means LICs are generally less likely to be influenced by short-term market fluctuations, making them potentially more resilient during market downturns . This could be appealing if you prefer a more hands-off approach, with the flexibility to buy or sell shares as your needs change.

The LIC route appeals to Marco as an investor (who, for the purposes of this case study, is someone we made up). He prefers a straightforward, low-touch approach and values consistency in his portfolio. Marco decides to invest in an LIC that has a strong history of paying dividends and focuses on long-term capital growth.

Marco likes that the LIC trades on the stock exchange, making it easy for him to buy and sell shares when needed. He also appreciates the transparency of regular reports and the LIC management team’s solid track record. Marco chooses this LIC as a core part of his long-term strategy, knowing that market conditions can affect the share price but valuing the potential for steady returns.

Disclaimer: Like Camilla, Marco is aware that the LIC’s share price can differ from its underlying value and that past performance does not guarantee future results.

Camila and Marco have each chosen between a managed fund or LIC for their portfolios. But that doesn’t mean you can’t have (or, if you'd prefer, avoid) both. You might choose to invest in managed funds and LICs to benefit from their different strengths over the long term.

Align with your long-term vision

Investing for the long term is a journey that requires thoughtful choices. Either a managed fund or an LIC can help you achieve your financial goals. The most important step you can take is to reflect on your own needs, goals, and comfort with risk. Consider how each option aligns with your long-term strategy and what feels right for you. Keep researching (this article is a good start), ask questions, and seek advice if needed. Your investment choices should empower you to build the future you envision, at a pace that feels sustainable.

Remember, every investment decision is personal. The key is to stay informed, keep your goals in focus, and make choices that support your long-term vision.