Types of investments

Understanding the investment basics

It's important to understand a few investment basics before you start to invest. Three major things to be aware of are:

• the different types of investments and how they perform
• the relationship between risk and return
• why diversification is essential for a sound investment strategy.

This page covers the different types of investments.

There are various types of investments know as ‘asset classes’. There are four main asset classes:

• Cash (e.g. money in the bank, bank bills)
• Fixed interest (e.g. government bonds, corporate bonds)
• Property (e.g. property trusts, residential, commercial, industrial)
• Shares (e.g. Australian shares, international shares)

 

These four types of investments can be separated into two broad groups:

• Defensive investments (cash and fixed interest): provide regular income and do not usually grow in capital value; investment returns and values fluctuate only slightly over short periods; over the medium to long term, returns are generally lower than those of growth investments
• Growth investments (property and shares): can provide growth in the value of your capital in addition to income; investment returns can fluctuate significantly over short periods although over the medium to long term, returns are potentially higher than those of defensive investments

It's important to have a basic understanding of these types because they each provide different levels of risk and investment return, which means they can perform quite differently and suit different circumstances.

You need to think about whether you are comfortable with experiencing fluctuations in the value and returns of your investments in order to achieve potential higher long term performance.

Of course, you can reduce these fluctuations by not putting all of your money into one asset class. By investing in more than one type of investment (known as diversification) you can significantly reduce the risks associated with any one investment type.

This chart summarises each investment type, providing an indication of the risk and potential return for each one and a minimum suggested timeframe.*

Defensive investments - generate income and don't usually provide growth in capital
Cash Cash generally refers to investments in bank bills and similar securities which have a short investment timetable. They provide a stable, low risk income in the form of regular interest payments.	Fixed interest Mostly government bonds, corporate bonds, mortgages and hybrid securities which generally operate in the same way as loans. The income return is usually in the form of regular interest payments for an agreed period of time.
Risk and potential return:	Risk and potential return:
Minimum suggested timeframe: No minimum	Minimum suggested timeframe: 1-3 years

 

Growth investments - provide growth in capital as well as income
Property securities Property securities are shares in property investments that are listed on share markets. They include commercial, retail, hotel and industrial property.	Australian shares A share represents part ownership of a company. Shares are generally bought and sold on a stock exchange. Returns usually include capital growth (or loss) as well as income from dividends.	International shares International shares generally work the same way as Australian shares. The additional benefit is the opportunity to invest in a wider range of countries and a broader selection of companies. Fluctuations in currency valuations can negatively (or positively) affect returns.
Risk and potential return:	Risk and potential return:	Risk and potential return:
Minimum suggested timeframe: 3 -5 years	Minimum suggested timeframe: 5-6 years	Minimum suggested timeframe: 5-7 years

* The risk indicators and minimum suggested timeframes used for each investment type are illustrative only and should not be considered as advice.  You should consult a Financial Planner in respect of obtaining advice regarding timeframes.

Seek advice on which investments suit your goals

Whether you're an expert or novice investor, good advice is important. Commonwealth Financial Planners specialise in helping you make the right investment decisions. A Commonwealth Financial Planner will work with you to develop a detailed plan containing the right mix of defensive and growth investments to achieve your personal financial goals.

To find out more about how a Commonwealth Financial Planner may be able to help you, or to make an obligation-free appointment with a Commonwealth Financial Planner call 1800 241 996 or email us.

Important information

• This is not advice, this provides general information only and does not take into account your individual financial circumstances or investment objectives. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment. Investment products are subject to investment risk including the loss of income and capital invested. Colonial First State Managed Investment Funds, FirstChoice Investments and FirstChoice Wholesale Investments are issued by Colonial First State Investments Limited ABN 98 002 348 352 AFSL 232468. Product Disclosure Statements (PDSs) describing the products are available by contacting Investor Services on 13 13 36. You should consider the relevant PDS before making a decision about the product. The responsible entity, Colonial First State Investments Limited receives fees.
• Commonwealth Financial Planners are representatives of Commonwealth Financial Planning Limited ABN 65 003 900 169 AFSL 231139. Commonwealth Financial Planning Limited is a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.