Broadly speaking, there are seven main types of investments available in the Australian marketplace:
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
The most common type of fixed interest investment is a bond. 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.
While not as common as bonds, there are several other forms of fixed interest investments available in today’s market. These investments are broadly referred to as hybrid securities and products that have been structure to have some of the features of a bond investments and some of the features of equity investments as described below.
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:
- As the overall value of the company increases, the value of your shares also increases;
- 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.
- Properties increase in capital value over time as house and land prices rise;
- 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
A new investment type that is gaining increasing recognition and importance in Australia and abroad is alternative assets. There is a wide variety of investments that fall into this category but the most common are:
- Hedge Funds: Funds that use a variety of complicated strategies to generate positive returns in all markets.
- Private Debt: High risk company loans.
- Commodities: Investments in real commodities such as gold bullion,
- Private equity; Purchasing shares in companies that are not listed on share markets.
- Infrastructure: Investment in large-scale public systems, services, and facilities.
These investments are often included in investment portfolios due to their unique risk and return characteristics. These investments are potentially very effective in smoothing the long term returns of a portfolio. They are however, extremely specialist in nature and should be treated with caution under the guidance of a qualified professional.
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.
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