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Where I’d invest my first $500 into ASX shares

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I think that investing in ASX shares is a great idea if you’re wondering where to start with $500.

You don’t need $50,000 to start investing in shares. You can start with $1,000, or even half that amount. It also costs very little to do a transaction. Buying (or selling) a property usually costs many thousands of dollars.

But which share should you buy? There are lots of different things you can invest in. These days one of the best ways to get started is with an exchange-traded fund (ETF) which allows you to invest in lots of different shares through a single investment.  

But the ASX share that I’m going to tell you about in this article is a listed investment company (LIC).

A LIC is somewhat similar to an ETF. Most LICs usually provide a diversified portfolio of shares, just like an ETF. However, LICs don’t just follow an index – the portfolios are constructed by managers. Some of those managers can outperform the index over the long-term (and plenty don’t).

Here’s my ideas for $500:

Future Generation Investment Company Ltd (ASX: FGX)

As I said, this is a LIC. But there are a few key differences.

The ASX share doesn’t charge any management fees or performance fees. Indeed, it hardly has any costs at all because of its philanthropic nature. It donates 1% of its net assets to youth charities each year. That’s where the ‘Future Generation’ part of the name comes in.

It doesn’t invest in individual businesses like a normal LIC does. Instead, Future Generation is invested in around 20 funds of different fund managers that invest in ASX share. The managers that it’s invested in include: Bennelong, Paradice, Regal, Eley Griffiths and Wilson Asset Management. The fund managers I mentioned represent almost half of Future Generation’s overall portfolio.

Each of those funds represent a portfolio shares, which could mean Future Generation may be invested in hundreds of different ASX shares. I think that’s great diversification. It probably provides better diversification than an ETF like BetaShares Australia 200 ETF (ASX: A200).

Performance

When you look at the latest performance update from 31 August 2020, Future Generation shows outperformance of the S&P/ASX All Ordinaries Accumulation Index over the past month, six months, year, three years, five years and since inception in September 2014.

Indeed, since inception the Future Generation gross portfolio return has beaten the index by an average of 2.6% per annum.

Good diversification and outperformance is a nice combination.

Dividend

LICs can choose to pay out a dividend from its investment performance. Future Generation aims to pay out a slightly higher dividend each year, if the profit reserve allows.

The ASX share currently has an annualised dividend of 5.2 cents per share. That amounts to a grossed-up dividend yield of 6.5% at the current Future Generation share price.

Is the ASX share a good buy today?

One of the most important things to know about LICs is that they can trade at discounts or premiums to their underlying asset value. In other words, sometimes you can buy $0.90 of assets for $1 of shares. Or sometimes you have to pay $1.10 for $1 of assets.

At the time of writing Future Generation has a share price of $1.14. This compares to pre-tax net tangible assets (NTA) of $1.2517 per share. That means it’s trading at a discount of 9% to August’s NTA. The NTA may have grown since then.

When you consider the diversification, the outperformance, the dividend yield and the NTA discount, I think Future Generation is a great ASX share investment for $500 right now.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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