Investment Vehicles: Exploring Options For Your Money

Investment vehicles are products used by investors to grow their money and generate profits. They can be low-risk, such as certificates of deposit (CDs) or bonds, or carry a greater degree of risk, such as stocks, options, and futures. There are several types of investment vehicles, and investors often hold multiple types in their portfolios to minimise risk through diversification.

Some common types of investment vehicles include stocks, mutual funds, exchange-traded funds (ETFs), bonds, and real estate. Each of these investment vehicles has its own unique features, benefits, and risks. For example, stocks offer ownership in a company and the potential for capital appreciation, while mutual funds provide access to a diverse and professionally managed portfolio of stocks, bonds, and other assets.

When choosing an investment vehicle, it is essential to consider your financial goals, risk tolerance, and investment time horizon. Additionally, understanding the risks and potential returns associated with each investment vehicle is crucial before making any investment decisions.

Direct investments

Stocks

Stocks are portions of companies, such as Amazon or Apple. You can earn money through stocks when you buy them at a certain price and sell them later when the stock price increases. You can also make money through dividends, which are profits that are given to shareholders. Dividend payments are made when a corporation gives stockholders a portion of its earnings. Stocks are mostly bought and sold on stock exchanges.

Bonds

Bonds are a specific type of debt. They are safe investment instruments as they are government-based securities. When you buy a bond, you are essentially loaning money to a company or the government. The bond issuer promises to repay your loan at a future date and pays interest on your loan until then. Bonds are fixed-income securities, meaning that they are loans from investors to borrowers, mostly corporate and governmental.

Real Estate

Real estate is a top-performing investment vehicle. You can make money through rental income and cash flow from rent, as well as through appreciation, as property value increases over time. Real estate can be a hedge against inflation, and it can provide tax advantages and a predictable cash flow.

Mutual Funds

Mutual funds are financial instruments that incorporate stocks, bonds, money market instruments, and other assets. They are managed by professional money managers who assist in allocating the assets to generate capital gains or income for the fund's investors. Mutual funds are frequently used by employer-sponsored retirement plans.

Exchange-Traded Funds (ETFs)

ETFs are pooled investment securities that hold groups of assets, usually stocks, but also bonds or other assets. They are bought or sold on a stock exchange, just like stocks. ETFs are more liquid than mutual funds and are more cost-effective. They are often used for diversification as they contain a variety of assets.

Indirect investments

Pooled investment vehicles are the most common type of indirect investment. Examples include open-end mutual funds, closed-end funds, and exchange-traded funds (ETFs).

With indirect investments, investors own the vehicle that invests the pool of money, rather than the underlying direct investments controlled by the vehicle. This means that investors have an indirect interest in each of the assets held by the vehicle.

Pooled investment vehicles make it possible for investors to create a diversified portfolio with fewer dollars than would be required to buy the individual securities directly. They provide a simple solution to what is often a complicated investment process.

ETFs are traded throughout the day on an exchange, so the market price of ETF shares can fluctuate outside of the boundaries of the fund's underlying net asset value (NAV). Mutual funds, on the other hand, are bought and sold at their NAV, which is calculated by subtracting liabilities from the fund's total assets and dividing by the number of shares.

Unit investment trusts (UITs) are similar to closed-end funds in that they issue a fixed number of units, but they have a set dissolution date when the trust buys back all outstanding units from investors. UITs are passively managed funds that hold assets until the trust terminates.

All investment vehicles charge fees, which may reduce investor returns. Typically, the more complex or sophisticated a vehicle is, the higher the fees will be. Some investment vehicles also provide tax advantages, which can affect an investor's overall financial circumstances.

Pooled investment vehicles

Shareholders of the pooled investment vehicle own the vehicle itself, rather than the underlying direct investments controlled by the vehicle. Some examples of pooled investment vehicles include:

• Mutual funds: A professional fund manager chooses the type of stocks, bonds, and other assets that should compose the client's portfolio. The fund manager charges a fee for this service.
• Pension funds: A retirement account established by an employer into which an employee pays part of their income.
• Private funds: Composed of pooled investment vehicles, such as hedge funds and private equity funds, and are not considered investment companies by the Securities and Exchange Commission (SEC).
• Unit investment trusts (UITs): Provide a fixed portfolio with a specified period of investment. The investments are sold as redeemable units.
• Hedge funds: Group together client money to make what are often risky investments using a long and short strategy, leverage, and exotic securities in the aim of achieving higher-than-usual returns known as alpha.

Public investment vehicles

Some public investment vehicles, such as exchange-traded funds (ETFs) and closed-end funds, trade on an exchange. The exchange matches buyers with sellers. Other public investment vehicles, such as open mutual funds, are bought directly from the sponsor, although a brokerage firm may assist with the purchase.

• ETFs
• Closed-end funds
• Open mutual funds
• Stocks
• Cash in savings accounts
• Real estate
• Bonds
• Retirement accounts
• Precious metals
• Rental real estate
• Lending investments, such as bonds, certificates of deposit (CDs), and Treasury Inflation-Protected Securities (TIPS)
• Cash equivalents, such as savings accounts or money market funds
• Pooled investment vehicles, such as pension plans, mutual funds, and hedge funds

Private investment vehicles

• Hedge funds
• Private real estate investment trusts, such as Blackstone’s BREIT
• Venture capital limited partnerships
• Private equity funds

Frequently asked questions