Understand these six types of investments
When it comes to building personal wealth through investing, it’s important to be familiar with the various types of investment choices. You will also need to be clear in your mind about your appetite for high risk investments. It is only once you fully understand the advantages and disadvantages of each investment type that you will be able to make informed decisions that suit your wealth accumulation goals and risk profiles.
High interest investments are most often high risk – in other words, higher risk results in a higher return and vice versa. The term of your investment is a crucial factor and you can use the term of the investment to determine your risk appetite. If you want high returns fairly quickly, consider a high interest investment. Ultimately, you want to grow your money in the way that best suits your financial needs and goals.
Below, we briefly discuss some of the most common investment asset classes:
Cash investment includes bank accounts, fixed deposits and similar securities which have a short investment time horizon. They provide low-risk income in the form of regular interest payments. They are highly liquid and have a low capital risk. A 32 Day Notice Account from African Bank pays out 5% interest on expiry. If you were to select the 90-day notice option, you would receive a higher interest of 5.65% on expiry. We also offer a short term deposit option, with interest starting at 3.93% on a seven day notice. As you can see, these deposits pay a high return when they mature, and the longer your notice, the higher your potential earnings. Your Notice Deposit account with African Bank has an indefinite term, as long as you maintain a minimum balance of R500. Register and open your account online in minutes.
A share represents part-ownership in a publicly listed company. You can either own common shares or preferred shares. The growth of the share price and dividends income are highly dependent on the company’s market performance. The benefits of share investment include liquidity and accessibility. While shares can yield high returns, share prices can be volatile and subject to short-term market conditions. If you’re trading in shares, it’s best to keep up to date on the global and local news so you can better understand how the economic situation affects the value of your stock investment.
- Fixed Interest
These investments include debentures and government bonds. Different from shares, bonds are debts owed by the government or companies that issued these fixed interest investments. The return is in the form of regular interest payments over the period of the investment with the capital amount repaid when the investment matures. They usually offer lower potential risks and returns than shares. The attractiveness of the return depends on the interest rate movements. The greatest risk when we invest in such assets is the default risk — the risk of the issuing governments or companies failing to repay the debts.
This asset class includes direct investment in physical property, as well as investments in listed real estate investment trusts (REITs) and other property securities. The value of the property can increase substantially over the medium-to-long term, generating higher returns than cash or fixed interest. This investment usually involves high capital outlay and on-going costs.
- Unit Trusts
A unit trust is a pool of investors' money, which is invested in a variety of financial instruments. When you invest in a unit trust, your money is pooled with other investors’ money to form a fund. It is then invested into various assets by a fund manager to meet the unit trust's objectives.
- Professional advice from a financial advisor
It’s always advisable to speak to your financial advisor regarding investments into the market. Depending on the amount of money you have to invest, and how quickly you need to see returns, choose the option that gives you the best return on investment. Don’t be deterred if you have a relatively small amount to invest – you can open an African Bank notice deposit account with as little as R500 and grow your investment by making extra deposits from as little as R100. It’s good to get different exposure and split the risk of the investment in case some markets do better than others. In this way, your investment will be protected against unwanted falls in the market.
Whatever your wealth accumulation goals are, it is important not to put all your eggs in one basket. Diversify your investment. Put your money into different asset classes to take advantage of the different risk-return profiles of your investment choices.