There are four main investment types, which are also called asset classes. Each come with their own benefits and risks. A mix of all investment types can help you minimise your risk by reducing your reliance on one particular investment type.
Cash investments include savings accounts that earn interest. It’s a defensive investment because the focus is on generating a regular income. Cash investments are the least risky type of investment, although the value of your savings could decrease if the interest you’re earning doesn’t outpace the rate of inflation.
2. Fixed interest
Fixed interest investments include term deposits, government bonds and corporate bonds. These are also defensive investments as they generate a regular (and sometimes guaranteed) income over time. As they are low risk investments, the income is likely to be less than potential income earned from shares or property.
A share represents a unit of ownership in a company. They’re generally bought and sold on a stock exchange, via a broking platform such as CommSec. Shares are considered a growth investment because their value can rise and they may also pay dividends (a portion of a company’s profit paid to shareholders). Historically shares are also considered one of the riskiest because it is difficult to predict a company’s future performance and share markets can fluctuate when political and economic conditions change.
If you decide to invest directly in shares, investing in a range of different types of companies or even countries may help minimise your exposure to risk
Property investment is commonly viewed as buying a residential house or unit but can also include commercial property, retail premises, hotels, industrial property and indirectly investing in a property fund. Like shares, property is seen as a growth investment as the value may rise and income can also come from rent payments. However, price increase is not guaranteed and it can be difficult to sell property quickly if you need to free up money.
Paying tax on investments
Capital Gains Tax applies when you sell an investment for more than you purchased it for. If you make a loss this is not able to be offset against your personal income, but it may be able to be used against capital gains in future years.
What next? You can speak to a financial planner if you think you may be ready to invest and begin building a plan that will suit you.