Types of investment vehicles: a guide to building your portfolio
Investing can be a complex and daunting task, especially for those new to the world of finance. Understanding the different types of investment vehicles is crucial for making informed decisions that align with your financial goals. In this article, we'll explore some of the different types of investment vehicles available, discussing their characteristics, risks, and potential benefits.
Investing can be a complex and daunting task, especially for those new to the world of finance. Understanding the different types of investment vehicles is crucial for making informed decisions that align with your financial goals. In this article, we'll explore some of the different types of investment vehicles available, discussing their characteristics, risks, and potential benefits.
Shares
What are they? Shares represent ownership in a company. When you buy a stock, you purchase a share of the company's assets and earnings.
Risks and Returns: Shares are known for their potential for high returns, but they also come with a higher risk, especially in the short term. Stock prices can be volatile and influenced by company performance, market conditions, and economic factors. Holding Shares in a handful of companies can lead to a highly concentrated portfolio and a lack of diversification.
Bonds
What are they? Bonds are essentially loans made to corporations or governments. When you purchase a bond, you're lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value at maturity.
Risks and Returns: Bonds are generally considered safer than Shares, but with lower potential returns. Risks include credit risk (the possibility the issuer might default) and interest rate risk (the risk of capital value changing if interest rates rise during the investment period).
Managed Funds
What are they? Managed funds pool money from many investors to buy a diversified portfolio of Shares, bonds, or other securities. Managed funds can offer investors access to a range of professionally managed investment strategies, from passive index tracking strategies to high-conviction active portfolios.
Risks and Returns: The risk and return of a managed fund depend on its underlying assets. Mutual funds offer diversification, which can reduce risk but may also come with higher management fees.
Exchange-traded funds (ETFs)
What are they? ETFs are like Managed funds but are traded on stock exchanges like individual shares. ETF’s have increased in popularity dramatically over the past few decades and today there are a range of passive, active and thematic strategies available to investors.
Risks and Returns: ETFs offer the diversification of mutual funds with greater flexibility in trading. There are also tax advantages of ETFs, such as minimising capital gains distributions, making them a tax-efficient choice for long-term investing. Depending on the brokerage platform, accessing ETF’s regularly through a dollar-cost averaging strategy may incur high brokerage costs.
Real Estate Investment Trusts (REITs)
What are they? REITs are companies that own, operate, or finance income-generating real estate. Investors can buy REIT shares, essentially investing in real estate without buying property directly.
Risks and Returns: REITs offer the potential for income through dividends and long-term capital appreciation. However, they can be sensitive to changes in interest rates and real estate market conditions.
Alternative Investments & Closed-End Funds
What are they? This category includes investments like hedge funds, private equity, commodities, and tangible assets like art or antiques. Often, the underlying investments of these strategies will be less liquid, and an investment manager may request that funds be locked up for a defined period. Securing capital also allows investment managers to execute more advanced or sophisticated investment strategies that can unlock enhanced returns. Close-end products may also have substantial taxation benefits attached to their structure.
Risks and Returns: Alternative investments can offer high returns and diversification benefits but can be riskier and less liquid than traditional investments. Often, these investments will have high minimum investment amounts and are typically accessible to sophisticated or institutional investors.
In conclusion, each investment vehicle comes with its own risks and rewards, and the best choice depends on your financial goals, risk tolerance, and investment horizon. Diversifying across different types of investments can help manage risk and optimise returns.
Arrow invests across various investment solutions, from the simplest investment structures, such as ETFs, to closed-end funds for sophisticated investors. It's advisable to consult with a financial advisor to tailor your investment strategy to your specific needs and goals.
