An investment portfolio or pension fund may include a range of different asset classes. Here’s a quick guide to what they all mean.
Cash is simply cash, held in a savings account. It will deliver low growth (only at the best rate of interest that can be found) but is very low risk. For this reason it is often included in portfolios and funds as a ‘safe space’ in which to store gains that have already been made. The only significant risk of cash is that it can gradually lose its value due to inflation.
There are three types of securities: equities, bonds and derivatives.
Equities, also known as stocks or shares (compare a selection of stocks & shares ISAs here), represent a stake in a company. If you own one, you own a small portion of the company. They can be bought and sold on stock exchanges and their value fluctuates, losing as well as gaining value. This makes them a high risk in the short term, but best suited to longer-term investment.
Bonds are essentially loans, either to governments or corporations, which are paid back over time with interest. They range from low-risk (e.g. UK government bonds, or gilts) to high-risk (bonds issued by a company raising money will depend on that company’s health), but on average they are lower risk than equities. They tend to provide steadier returns and to fluctuate less in value.
Derivatives are complex investment products, to be approached only with caution (and following specialist professional advice). The value of derivatives is based on (‘derived’ from) the performance of another type of asset.
You can invest in a wide variety of physical assets, ranging from farm produce such as grains to gold bullion. All are known collectively as ‘commodities’. Investing in commodities is relatively high risk, and they tend not to deliver as much growth as securities either. So why invest in them? The advantage of commodities is that their performance is completely independent from that of securities – meaning that they can help to balance a portfolio by offsetting the risks and cushion the potential losses from securities.
If you’re keen to invest in a range of different types of investments, but you don’t have the time or the knowledge to pick your own portfolio, a collective investment could be a good option. With this type of investment, your money is pooled with other investors’ and then invested across different asset classes.
An OEIC, or Open-Ended Investment Company, sells shares in the company itself. It then invests money to buy assets on your behalf, and the performance of the investments affects its share price. Different OEICs offer different levels of risk and potential return depending on what they invest in, so it’s worth consulting a financial adviser before deciding where to put your money.
If you invest in a unit trust, you buy units of a fund which is run by an experienced fund manager. The manager picks the assets to invest, based on their view of which investments are likely to perform best. Depending on your investment goals and time-line, an independent financial adviser can help you choose the right unit trust for your money.