Do you have some cash in a savings account and you’re looking to grow it more effectively? It may be worthwhile looking into investing it elsewhere.
The best investment is one that best suits your financial goals, investing time frame and risk tolerance. We’ve put together an overview of the types of investments and expected returns to help you decide which is right for your financial goals.
A defensive investment will have a lower risk, but this will come with a lower return. The focus of a defensive investment is first and foremost capital preservation, and secondly, generating a regular income. The capital value is generally not expected to grow in value over time. The two most common defensive investments are cash and fixed interest.
A cash investment can range in duration from 90 days anywhere up to 30 years, which provides a return in the form of interest payments. If you are looking for a low-risk investment and looking to preserve your capital, then cash investment may be appropriate.
The main benefit of a cash investment is that it provides stable, regular income through interest payments. Although risk of capital loss is low, it is possible the value of your cash could decrease over time, even though its dollar figure remains the same. This may happen if the cost of goods and services rises faster than the interest rate paid on the balance. This is known as inflation, meaning your money buys less than it used to.
Types of cash investments are:
A savings account is the most common type of cash account as the default place cash is kept in the absence of any other investment. A savings account will generally offer monthly interest, however, the interest rate paid on the balance is typically variable and moves in line with the Reserve Bank of Australia (RBA) cash rate.
As the name suggests, a savings account is a bank account used for saving and the proximity to one’s wages account makes this simple. Interest is paid on the money in the account, while still giving access to the savings when needed. Some savings accounts may also pay bonus interest when certain conditions are met, such as growing the account balance by the end of the month.
The interest rate can vary widely by bank so it is important to shop around for the best rate using a tool like Canstar. It is also important to understand the restrictions on the account the conditions attached to the bonus interest, as the bonus interest typically makes up the bulk of the total interest paid.
At present, the return on term deposit is very minimal offering only an interest rate of 1.5%.
Term Deposit (TD)
A Term Deposit is a form of ‘time deposit’ and in return for your capital the bank will pay you a higher interest rate if you promise to keep your cash in the bank for a pre-determined amount of time. It is an among the safest investments available from banks and credit unions. Term Deposits is generally pay higher interest rates than your basic savings accounts and money market accounts, but there is one drawback, you must lock your money in the account for a specific period of time. It’s very hard to get your money out early, you’re likely to pay a penalty.
The biggest benefit of savings account over a term deposit is you’re able to access your savings should you need to, while still earning interest. The downside of a savings account is that the interest rate tends to be very low.
A money market refers to trading in a very short-term debt investment.
At the wholesale level, it involves large-volume trades between institutions and traders. At the retail level, it includes money market mutual funds bought by individual investors and money market accounts opened by bank customers.
In all of these cases, the money market is characterized by a high degree of safety and relatively low rates of return on investments over short periods.
Fixed interest or fixed income is a type of investment that offers regular returns over a specific period of time. A Fixed income security is typically a bond, which is debt issued by a company or government that offers a fixed interest rate, called a coupon. Since the coupon is known, the investor will lock in that interest rate for the lifetime of their holding. Debt securities can be issued over any time frame and can range from 1 year up to 30 years.
Fixed interest securities are traded on the open market and while the coupon payments won’t change (barring financial distress), the capital value may. The capital value (or security price) would change to reflect the market’s current view on what interest rate they feel is appropriate on that given day. This is possible because the coupon payment is known. These moves generally follow market interest rates so if interest rates fall, the security price is likely to rise. On the face of it, this may seem like you are taking on equity risk for bond returns. However, note that bonds will be redeemed at maturity for the face value so if you held the bond to maturity. You will always get the coupon payments with the full face value of the bond returned.
Oracle’s Fixed Income Portfolio provides investors a reliable income stream derived from a portfolio of high-quality corporate bonds. Using a unique strategy combining capital growth and regular interest payments, investors can relax, knowing their capital is in safe hands while living off the income. We invest in bonds that are issued to large banks and companies, many of which are listed on the Australian Securities Exchange as well as the United States or European stock exchanges.
A growth investment comes with higher risk and can potentially earn a higher return on investment compared to defensive investments. Growth investments aim to provide capital growth, which is often complemented by income such as dividends for shares or rent for property.
Property is one of the most common forms of investment in Australia. Australia’s property market has a long track record of capital growth, the investment is often seen as less risky than other forms of investment. However, while investing in property might seem straightforward, there are risks to be aware of before proceeding.
Firstly, investing in property is not a quick return on investment it is a long-term endeavour. There are also additional costs involved in buying and selling property such as stamp duty and agents’ commissions, both of which can be substantial. Furthermore investments in property are generally highly leveraged, meaning the investor only invests a small portion of the capital with the bank lending the remainder. This can be excellent if the value of the property increases (as the loan can easily be repaid with the sale proceeds). Nevertheless, it can be detrimental if the value of the property falls (in which case the sale proceeds would not cover the loan).
There are many reasons why investing in property continues to be a popular choice for Australian investors. Although, mistakes can be expensive, so it’s always a good idea to think about why you’re investing in the first place, and whether it fits with your individual circumstances. House prices are currently booming, and the CBA expect this to continue with house prices forecast to increase by a massive 16% over the next two years.
Understanding the property market takes time, so it is important to do your research and planning before taking the plunge. Purchasing a property can be one of the biggest transactions you will make. It is important to get it right.
Oracle’s Lending Specialists team can help you find the right loan for you and assist you to understand the features of the loan to ensure that it fits in with your desired strategy.
While shares can be segregated into various subsectors based on industry or growth profile, shares are considered growth investments as the expectation is for capital growth. Or in other words, selling shares for a higher price than you initially paid for them.
If you own shares, you may also receive income from dividends, which are a portion of a company’s profit paid out to its shareholders.
Of course, the value of shares may also fall below the price you pay for them. Prices can be volatile from day to day and shares are generally best suited to long term investors who are comfortable withstanding these ups and downs. Although they have historically delivered better returns than other assets, shares are considered one of the riskiest types of investment because a share is direct claim on the cash flows and assets of the business. In times distress or bankruptcy, shareholders’ claims are last in line behind bondholders and other creditors. Shares are also vulnerable to sudden fluctuations in price that can result in big gains or losses in the value of your investment.
The best way to protect yourself is to diversify your portfolio of investments. Which is to spread your investment between different industry sectors. By diversifying, you take advantage of each company’s strengths and helps to lower your risk.
If you are new to Investing, Managed Portfolios or Funds might be a great option for you, as you can rely on the expertise and knowledge of an investment manager to manage your money and further your individual investment goals. At Oracle Investment Management, we specialise in the active management of equity, property, and fixed income portfolios that can be tailored to individual circumstances
A Financial adviser can help you to set your financial goals and understand your individual risks and find the right investment tailed to you. Contact our advisers who can help you reach your goals.
An alternative investment is an asset that is not one of the conventional investment types, such as stocks, bonds, and cash. Alternative investments include private equity, hedge funds, futures and derivatives, commodities, wine, art, and collectibles.
Most alternative investments are high risk and returns differ depending on the type of alternative investment.
Hedge Funds undertake a variety of complicated strategies – such as short selling, using leverage, and using derivatives – that aim to reduce volatility of investment returns
Private Debt: high risk company loans in an illiquid market
Private Equity: purchasing shares in companies that are not listed on share markets
Infrastructure: investing in large-scale public systems, services, and facilities
Alternative investments are often included in an investment portfolio of those that have the appetite for unconventional and at times more risky investments. As they are extremely specialist in their nature, alternative investments need to be treated with caution and under the guidance of a qualified investment professional.
How to choose your investment?
The type of investment you select will largely depend on the level of returns you seek and the level of risk you are comfortable taking and can afford to take. Once you understand this you should also:
Know how the investment works
How it generates a return and the type of return expected
Understand the risks of the investment
Research the fees and charges for buying, holding, and selling the investment
Estimate how long you should invest to receive the expected return
Understand the legal and tax implications of your investments
Diversify your Investments
A great way to manage risk can be to spread your investments across different asset classes. This is known as diversification and is one of the first things you will learn about when looking into how to invest for beginners.
Diversification reduces your overall investment risk and leaves you less exposed to a single economic event. So, if one sector or asset performs poorly, the other areas of your investment may not be as badly affected.
It can also be a good idea to diversify within asset classes. For example, a share portfolio may hold shares across different sectors such as banking, resources, healthcare and technology, and across both domestic and international markets.
Before you jump headfirst into investing, it is vital to consider each type of investment and then determine your asset allocation that aligns with your investment goal.
There are many types of investing options to choose from. Some can be appropriate for beginners, while others require more experience. Each investment comes with its own level of risk and rewards. The first step is work out what you want to achieve by investing your money and then how much you are willing to invest and whether you wish to invest for short or long-term returns.
It’s also important to look into any potential legal and tax implications, as these can vary depending on the type of investment you make.