Understand the types of investments
The following asset classes are some common forms of investments:
Cash
The simplest type of investment is through a savings or fixed deposit account where the bank pays you regular interest on your principle. Cash investments are generally safe and are easily accessible. It is important to keep some cash savings for short term and emergency needs.
While cash investments are generally non-risky, accumulating wealth solely through savings is a long-drawn process, especially when the current savings rate is very low.
While cash investments are generally non-risky, accumulating wealth solely through savings is a long-drawn process, especially when the current savings rate is very low.
Bond
Bonds are loans issued by companies (corporate bonds) or by governments (government bonds) in order to raise money. The issuer (i.e. companies or governments) pays the investor the amount loaned on a specific date and a regular fixed interest rate.
Bonds are rated by third-party rating agencies such as Standard & Poor's, Moody's or Fitch. Investment grade bonds are those rated BBB and above, while non-investment grade (or high yield bonds) are rated below BBB. In general, investment grade bonds are less risky than non-investment grade bonds.
Bonds are generally less risky investments than investing in stocks (see Risk and Return profiles of common asset classes below)
Bonds are rated by third-party rating agencies such as Standard & Poor's, Moody's or Fitch. Investment grade bonds are those rated BBB and above, while non-investment grade (or high yield bonds) are rated below BBB. In general, investment grade bonds are less risky than non-investment grade bonds.
Bonds are generally less risky investments than investing in stocks (see Risk and Return profiles of common asset classes below)
Equity
Companies can also issue equity (also known as stocks or shares) to raise money. Investors who invest in equity (i.e. shareholders) are essentially buying a stake in companies and are participating in the future of companies. Some companies also issue dividends to shareholders.
Equity is generally considered to be a risky asset as it can significantly increase or decrease in value over a short period of time.
Equity is generally considered to be a risky asset as it can significantly increase or decrease in value over a short period of time.
Property
Many investors favour property investments for rental yields. However, remember that property prices can fall and selling a property can take time which could be a problem if cash is needed immediately. Property investments also require a large amount of capital and there is a risk that too much of your wealth is concentrated in only one asset class.
You may gain exposure through the property asset class by investing in equities of property holdings companies.
You can invest directly in the above asset classes through managed funds. While there is good chance of preserving your capital in a lower risk investment (like cash), the returns on this form of investment is low. Higher risk investments like equity may provide good returns but the risk of losing your capital is higher. It is important not to be solely invested in one asset class. Learn about building a diversified portfolio in the next section.
You may gain exposure through the property asset class by investing in equities of property holdings companies.
You can invest directly in the above asset classes through managed funds. While there is good chance of preserving your capital in a lower risk investment (like cash), the returns on this form of investment is low. Higher risk investments like equity may provide good returns but the risk of losing your capital is higher. It is important not to be solely invested in one asset class. Learn about building a diversified portfolio in the next section.
Risk and Return profiles of common asset classes
Source: Bloomberg, MSCI, Fidelity. The risk and return of the asset classes are calculated from 31 Dec 1990 to 31 Dec 2010 and are represented as follows: Cash: 3 month SIBOR, Bond: Citigroup Government World Index, Equity: MSCI World Index (Gross) in USD, Equity (Singapore): MSCI Singapore (Gross) in SGD and Property: S&P Developed World REIT (Gross) in USD. Note that the risk and return profiles of the Property sector shown above is based on stocks of companies involved in the property sector.
You can invest directly in the above asset classes through managed funds.
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