Minggu, 07 September 2008

Types of investments


The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.

Broadly speaking, there are six main types of investments available in the Australian marketplace:

Cash & Fixed Interest investments
Bonds
Shares
Property
Managed funds
Superannuation

Cash & Fixed Interest investments
Cash investments are the most common form of investment in Australia, encompassing products such as bank accounts, term deposits and Cash Management Trusts.

The appeal is that they provide easy access to your money when you need it, and there’s no chance you could lose any capital – so they’re very secure.

However, whilst they do offer security, they usually provide very little income and no capital growth. So they can actually be quite risky over the long-term because inflation eats away at the value of your investment.

For most investors, these products are suitable for:

Use as a transaction account
Keeping cash on hand for short-term expenses and emergencies
Short-term savings where you cannot afford any risk to your capital


Bonds
Bonds are a loan made to either a government or a corporate organisation – you “loan” your money for a set amount of time at a predetermined interest rate (either a fixed rate or at a fixed level above a variable rate) and receive a steady income stream through regular interest payments.

Bonds can be traded at prices that reflect prevailing interest rates. At the end of the term, you receive a payment equal to the bond’s face value.

Whilst bonds generally provide a more attractive return than cash, they do carry higher risk. The price of a bond rises as interest rates fall, and falls as interest rates rise. If interest rates rise sufficiently, it is possible to obtain a negative investment return.

Bonds are generally suited to investors who are seeking a higher return than is available from cash, but who are still seeking a low risk investment.


Shares
Shares (also known as “equities” or “stocks”) represent ownership in a company. When you buy a share, you become a part owner in the company and become entitled to share in its future value and profits.

Shares offer growth to investors in two key ways:

1.As the overall value of the company increases, the value of your shares also increases.
2.Companies can also elect to pay part of their profits to shareholders as an income payment, rather than reinvesting all profits back into the company. These income payments are known as “dividends”.

One of the major advantages of dividends is that they can be very tax effective. If you invest in an Australian company that has already paid tax on its profits, tax credits (known as franking credits) may be attached to the dividends the company pays to you. These franking credits can be used to offset tax payable by you, on other income. In addition, shares held for more than 12 months qualify for a 50% discount on any capital gains tax payable.

As shares are simply little parcels of companies, they have the potential to generate very high investment returns. However, they also have the potential to fall in value if the company’s performance falters.

Shares are generally best suited to investors who:

Want to build up a solid nest egg for medium and long term savings goals
Have a longer investment timeframe (5-7 years +)
Are comfortable with some volatility in their investment value over the short-term, in exchange for higher returns over the long-term.


Property
Property is one asset class that most Australians are already very familiar with.

Property investment offers value to investors in two ways:

1.Properties increase in capital value over time as house and land prices rise.
2. You earn rental income from your tenants.

Like shares, property prices fluctuate and have periods of sustained high returns and sustained low returns, so property is generally only suitable as a long-term investment.

Property is generally best suited to investors who:

Don’t require “emergency” access to their money
Have a long-term investment timeframe (5-7 years +)
Have the ability to meet mortgage repayments in the event that interest rates rise or when they have difficulty finding tenants


Managed funds
Managed funds work by pooling lots of individual investors’ money together and buying a large number of different assets (which may include shares, property, bonds and fixed interest).

Professional fund managers decide what percentage of the fund should be invested in each asset class, and also which countries, industries and companies have the best prospects for good returns.

Each investor then receives “units” in the fund, with each unit representing a mix of all the underlying assets.

There is a wide range of different types of managed funds available – some offer access to one or two asset classes, and others offer a mix of everything. Some managed funds also allow you to mix the actual fund managers that select and maintain the underlying investments.

The specific investment style and process of each fund is outlined in its Product Disclosure Statement (PDS).

Managed funds are an ideal option for people who are:

New to investing
Happy to outsource the selection of investments to professional manager/s
Have a small initial amount to invest (with the option to make regular additional contributions)
Seeking investment diversification to minimise risk.


Superannuation
Superannuation (super) is an investment vehicle set up specifically to hold your retirement savings.

Depending on your super fund, you can invest in a wide range of underlying assets, including shares, property, bonds, fixed interest and managed funds. In fact, you can invest in almost all the same assets you can access outside super, but with a range of attractive tax advantages.

The key difference is that super is restricted for use in retirement – so it’s not suitable for saving for pre-retirement goals.

Super is a good investment option for:
Savings made solely for funding your retirement
People seeking to reduce their tax

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