Different types of investments
Most investments fall into four categories or asset classes:
These have different levels of return and are associated with different levels of risk. Which asset class or combination of asset classes is right for you depends on your comfort with risk, the time horizon over which you are prepared to invest your money and your financial goals.
Cash
Cash includes government issued short term bonds, bank deposits, savings accounts and cash management trusts offered by financial institutions. These products generate income in the form of interest earned. Of all the asset classes, cash is the most secure, though provides low returns compared to other asset classes over the longer term. Capital value (the amount you invest) increases only by the amount of interest you earn and can also be eroded by inflation.
Fixed Interest
These are income generating investments and include government bonds, debentures, fixed interest trusts and fixed term deposits. With this asset class, you invest for a defined term e.g. 1 year and then receive your capital plus return at the end of the period. Fixed interest products offer security though earn lower returns than property and shares over the longer term.
Property
There are a wide variety of property investments including retail, residential, industrial, commercial and agricultural property, or property trusts. Investment property can offer tax advantages when you receive rental income. You can invest directly, e.g. where you own the property, or indirectly, where you invest in a property trust. Compared to shares, property investments are generally less volatile though also earns a lower return over the longer term and can be influenced by changes in economic conditions.
Shares
When you purchase Australian or overseas shares, your investment buys you shares in a company. You earn the benefits by participating in the growth in the shares of that company and its profits. Shares can provide you with an income stream in the form of dividends paid on a regular basis. Historically, shares offer the highest returns over the long term compared to all other asset classes, however, they are also the most volatile. That is, the value of your investment can go up and down with performance of the company or share market. Because of this they are considered a longer term investment.