Setting the scene for investment decisions, asset classes broadly describe forms of securities that have mutual characteristics, both in terms of behavior and how they are regulated. Those that you primarily need to be aware of as a new investor are:
- Fixed Income - Largely bonds, with issuer obligation to pay fixed amounts, to a set schedule
- Equities - stocks and shares. No obligation to pay an income
- Cash Equivalent - Money markets and related instruments
A fixed form of deposit, made with a financial institution for a set term during which the customer may not access the funds they have invested. In some cases an agreed period of notice may also permit withdrawal of some or all funds. The fixed nature and defined period make term deposits a conservative, typically sure but low yielding investment.
For more productive investments with significantly higher returns over inflation, a riskier security is typically needed.
There are various classes of bonds, all of which need to be fully understood before undertaking any specific investment course. A mix of corporate bonds and more risk-averse options, often tax exempt, can provide a firm return but, again, need to be properly researched and the complexity will rise with every additional layer.
We wrote in more detail on bonds here last November.
Mutual funds make a diverse portfolio of financial securities available to the group of investors putting their money in the fund pool. This may take a variety of forms.
When closely tied to indexes by the money managers responsible for their operation, a fund can be described as "passive investing", as it seeks to match the returns of a given stock index. More actively managed funds attempt to outperform a given index, which can be seen as a more risky venture, depending on the stocks selected.
We also looked at Exchange Traded Funds, a flexible alternative to other index-based funds, in the first entry in this glossary.
Hedge funds are carefully constructed, targeted portfolios that are open-ended, meaning that withdrawals can be made and fund levels changed.
Here, investment strategies and portfolios begin and we move into riskier, more complex territory. The minimum investment levels and tendency towards higher risk investments in order to achieve higher returns can make hedge funds inaccessible for newer entrants, though understanding their place in the spectrum of options can be helpful in making other decisions.
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