Investment types explained
Investment types explained
We have summarised the main asset types below.
The value of your investment when using any investment type could go down as well as up, and you could get back less than you originally invested. Please also note that investing in riskier assets offers the potential for greater returns but also has the potential for greater losses.
This term is used to describe investments such as cash. They work in much the same way as a bank or building society account. Investments are put on deposit with a financial institution where they earn interest. Deposits are generally considered safer than other asset classes; however, over the longer term they are likely to provide lower returns.
Corporate bonds and gilts
Corporate bonds are loans to companies for a set period. During this period the company pays interest and eventually returns the original amount.
The main risk with a corporate bond is that the company to which the loan has been made might go bankrupt and fail to pay it back. Corporate bonds tend to be less volatile investments than company shares but provide the opportunity for higher growth than deposits.
Gilts are loans to the Government and work in much the same way as corporate bonds. However, gilts are considered very safe investments - since the Government is unlikely to go bankrupt.
To date, the British Government has never defaulted on a gilts issue. Like corporate bonds, gilts tend to be less volatile than company shares but provide greater opportunities for growth than deposits.
Equities are company shares. Limited companies can sell their shares to raise capital, paying a share of their profit (known as a dividend) to the buyer in return. Shares are bought and sold on the stock market, and their prices fluctuate based on a number of factors including the company's potential profitability. As a result, they tend to be too volatile for short-term investors.
However, it is widely accepted that equities have the potential for better returns over medium and longer terms.
It's also worth bearing in mind that equities traded on some overseas stock exchanges can be more volatile than UK equities, and that the value of overseas equities may also be affected by changes in exchange rates.
Some funds will invest in a mixture of different asset classes such as company shares, property and deposits. This way, if one particular investment performs poorly, you won't be as badly affected because your risk is spread more widely.
Many pension providers let you invest in different types of property. Property funds typically invest in retail outlets, industrial sites and office buildings.
One proviso: because the property in a fund might not be readily saleable, it's possible that you might not be able to cash in your investment in a property fund when you want to. Also, the value of property is generally a matter of a valuer's opinion rather than fact.
This sector is hugely diverse and will contain funds with various investment objectives and styles, for example:
- Commodity funds
They invest in the shares of commodity related companies such as mining and oil exploration companies. They provide exposure to movements in commodity prices with an additional layer of active management.
- Absolute return funds
These funds aim to deliver positive returns regardless of market conditions, rather than simply setting out to beat a benchmark.