Before you start investing your money, you should understand the different types of investments. Every investment has its own set of risks to consider before you invest into it. The preferred method is to invest into more than one asset class, thereby providing a mix of asset classes which may provide a well-rounded portfolio and reduce investment risk.
Your investment decisions and choices should consider various factors such as your reason for investing, the timeline of the investment and your risk profile.
Most investors want to invest in such a way that they achieve sky-high returns as fast as possible without the risk of losing his/her original money invested. This is the reason why many investors are always on the search for high yielding investments, where they can double their money in few months or years with little or no risk.
However, risk and returns are directly related correlated, which means that the higher the returns, the higher the risk, and the lower the returns, the lower the risk.
Below are a range of investments options.
- The stock markets
Investing in the shares of a company listed on the stock market, is the option that offers the most potential for reward. Furthermore, the companies listed on the stock market are governed by regulations, which provides a level of protection to investors, compared to unlisted and unregulated investments schemes.
Bonds are considered less risky than stocks or share investments. However, their potential for returns is also that much lower. When an investor invests into a bond, the investor must ensure that the interest or coupon rate of the bond is greater than the inflation rate. Furthermore, where an investor is investing into foreign government or company bonds, the investor must also be wary of currency fluctuation rates, which may cause an erosion of investment value.
3. Mutual funds
Rather than buying a single stock, mutual funds enable an investor to purchase a basket of stocks or shares. The stocks in a mutual fund are usually chosen and managed by a mutual fund manager, who will invest on behalf of the clients.
A mutual fund is a pool of funds from many investors that are diversified into many different things including, stocks, bonds, and other assets.
The advantage to investors is that mutual funds and the fund managers are regulated and must comply within strict guidelines.
4. Savings account
The least risky way to invest your money is to put it in a savings account and allow it to collect interest. However, low risk means low returns. Still, savings accounts play a role in investing as they allow an investor to store a risk-free sum of cash that is available in times of emergencies, so that an investor will not need to sell off or liquidate other investments.
Notwithstanding the level of risk, an investor must again be mindful of the interest rate achieved compared to the inflation rate exposure within the country in which the investor is living and spending their returns.
5. Physical commodities
Physical commodities are investments that one physically own, such as gold or silver. These physical commodities often serve as a safeguard against hard economic times.
If an investor considers investing into a commodity, be aware that the protection against a price fluctuation is based on scarcity and fear.
6. Real estate
Where an investor has sufficient capital, real estate investments have been one of the most secure and preferred investments for centuries.
However, where an investor does not have sufficient capital, or access to affordable, fair and equitable finance, then an investor may consider publicly listed property investment vehicles, like Real Estate Investment Trusts (REIT) or forming property investment syndicates.
When investing into one’s own investment property, the location of the property is the most important factor, coupled with the lease covenant, which will determine the value of the investment property and also the rental that it can earn. Investments into real estate deliver returns in two ways - capital appreciation and rentals.
7. Off-shore ETF
An off-shore “exchange-traded fund” (ETF) is an investment fund traded on foreign stock exchanges and it trades throughout the day. An ETF holds multiple assets such as shares, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur. ETFs have low expense ratios and fewer broker commissions.
8. Unit trust
A unit trust is an independent mutual fund structure that allows funds to hold assets and provide profits that go straight to individual unit owners instead of reinvesting them back into the fund. The investment fund is set up under a trust deed. The investor is the beneficiary under the trust.
A unit trust's success depends on the expertise and experience of the company that manages it. Common types of investments undertaken by unit trusts are properties, securities and cash equivalents.
9. Pension funds
A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income.
Pension funds, in many instances, are the major investors in listed and private companies. Some pension funds support at least one pension plan with no restriction on membership while other pension funds support only pension plans that are limited to certain employees.
Many countries’ pension systems are based on a three-pillar system:
1. A non-contributory grant provided to the majority of pensioners
2. Various insurance-based employee and company pensions and provident funds
3. Private pensions and insurance arrangements.
The first option is funded through tax contributions. The pension is provided to those with income and assets below a certain threshold.
To evaluate whether an investor has chosen the correct pension, they may compare it on an benchmarking index such as the Melbourne Mercer Global Pensions Index.
Risk tolerance and time horizon each play a big role in deciding how to allocate your investments.
Conservative investors may be more comfortable allocating a larger percentage of their portfolios to less-risky investments. This usually applies to those nearing retirement.
Those workers still accumulating a retirement nest egg are likely to fare better with riskier portfolios, as long as they diversify. If you’re looking to grow your wealth, you can elect one of two options: lower-risk investments that pay a modest return or you can take on more risk and aim for a higher return.