The building blocks: Three ways to invest
When making that investment plunge, one option for investors is to use what’s called a pooled investment vehicle. As the name suggests, this is a structure where all of the investors’ money is combined into one large pool, which is then managed by a professional fund manager. Investors can add to or withdraw their money from this pool as needed.
Like all investments, the value of the pool can go up or down and depending on the underlying investments. Investors can also receive income on a regular basis. Pooled vehicles are a way to get access to the investment expertise of fund managers, as well as access to a broader range of investments. For example, every dollar you invest in a pooled investment vehicle that invests in shares can be spread across multiple different companies giving you the benefit of a diverse portfolio.
Pooled investment vehicles come in three main types: managed funds, exchange-traded funds (ETFs), and listed investment companies (LICs).
These investment types cover various asset classes including bonds, shares and property. The investment strategies range from simple, low-cost, index strategies all the way to higher cost, active approaches, and also include some complex options. They can be offered as a single asset class vehicle or a vehicle where multiple asset classes are combined.
As a pooled investment, ETFs often give their owners access to a bunch of different assets. While investors buy shares in an ETF, the ETF provider buys the underlying assets.
ETFs can be bought and sold in the pretty much the same way as you can buy or sell shares in a company. The shares are valued daily, and the price of the share is linked to the value of the underlying investments.
The largest and oldest ETFs are passive investments, which means they simply try to replicate the behaviour of a market or market segment. These ETFs are a cost-effective way of getting exposure to various markets.
Managed funds pool the money of individuals, which are then invested by a professional fund manager. Managed funds are a type of unit trust. They are not listed on the stock exchange. Investors apply to invest or transact directly with fund managers, through investment platforms or the ASX’s mFunds service.
As the names suggests, a LIC is a company that is listed like any other company on a stock exchange. Unlike most companies the primary purpose of an LIC is to act as a pooled investment vehicle. The investor buys a share in the LIC and the LIC buys the underlying assets (like an ETF). Similar to an ETF, the share price of an LIC should be closely related to the value of the underlying assets.
Unlike an ETF no real mechanisms exist to keep this difference to a minimum. This means that the LIC can trade at a ‘premium’, where the price of the share in the LIC is higher than the value of the underlying investments. On the flip side the LIC can trade at a ‘discount’ meaning the price of the share is lower than the value of the underlying discounts.
In summary not all pooled investment vehicles are the same. Understanding the differences will assist investors in determining which option best suits their investment needs and objectives.
Morningstar is an independent investment research house. Any general advice has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your objectives, financial situation or needs. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Past performance does not necessarily indicate a financial product’s future performance.
For advice relating to your personal situation, speak to a professional financial adviser. If you’re having trouble with money, speak to a free financial counsellor via the National Debt Helpline: 1800 007 007.
Want to learn more about investing? In the below video, First Nations Foundation CEO Phil Usher shares some of the main principles of investing.
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