The investment landscape can be a tricky one to navigate. For many of us, we’ll have some retirement savings building up, perhaps some personal ‘rainy day’ money and maybe even a trading platform where you’re hoping Bitcoin will reach the highs it once did. But understanding the vehicles themselves is rather important.
Whatever your investment journey, understanding the moving parts that make up the ‘matrix’ is critical. To assist you, below is a simple summary of the many investment vehicles you may encounter during your investment life:
Listed – Mutual Funds, Indexes and ETFs
Mutual funds (sometimes referred to as ‘unit trusts’) and Exchange Traded Funds (ETFs) are some of the most common investment vehicles you will encounter. They are simple to understand, fairly well priced and the options are plentiful. They provide their investors with different exposures, markets, sectors and strategies.
A major advantage of these funds is the fact that they offer liquidity, ease-of-access and broad diversification. ETFs and Index Funds will be cheaper, as they track indexes without the involvement of a fund manager, like in the case of a mutual fund.
Unlisted – Private Equity, Private Capital, Venture Capital and Hedge Funds
Don’t let the name ‘unlisted’ frighten you. These are simply vehicles that are not traded on an exchange. They tend to have longer time horizons, restrictive rules about encashment, and higher fees (in general).
These vehicles will often target higher returns than listed funds and the different strategies employed can be quite out-of-the-ordinary or ‘alternative’. They are very actively managed, which does tend to draw a higher fee, but the rewards can be considerable.
Money Market Funds
These funds are the place to be if you’re looking for something safe, predictable and low-risk. They are used to protect capital, ensure access and generate regular returns/income through short-term investment strategies.
Stability, liquidity and higher-than-savings-accounts’ interest rates make these vehicles rather attractive. On the flip side, the returns will likely disappoint when compared to those of a diversified listed fund which is held for a long period.
Sector funds offer specific exposures to particular sectors in the global economy. Whether it be mining, property or finance, these funds offer targeted exposure to those seeking it. Many investors ask that their investment objectives be aligned to their personal preferences. Sector funds acutely meet this need.
Because of the obvious concentration in these funds, volatility risk is a major consideration and is not to be taken lightly. Investors should seek to understand the sector they wish to invest in and appreciate all of the factors that underpin it.
Asset Allocation Funds
Commonly referred to as ‘Managed’ or ‘Balanced’ funds, these vehicles aim to provide a diversified range of exposures within a single fund. The balance of risk assets and fixed-income assets will be determined by the fund mandate, which allows investors to choose a fund that suits their needs, goals and objectives.
Periodic rebalancing and active management are desirable advantages here. During periods of economic expansion, however, they will underperform their equity-only counterparts.
Real Estate Investment Trusts (REITs)
The strategy of REITs is to pool investors’ capital together and collectively invest in the opportunity to enjoy regular income and the potential for capital gains, without the dangers of investment in property directly.
There are many of these funds to choose from, so investors can match their funds to their specific requirements.
Property is a sector that can fluctuate quite dramatically during different economic cycles. Similar to Hedge Funds and Private Equity, liquidity is often a concern.
From the desk of AMA International Chief Investment Officer, Stewart Dando