Cash Investments are short-term money-market instruments. Generally, they remain stable in price and pay a modest amount of interest. However, inflation often outpaces such holdings, which means that the capital amount erodes over time.
Bonds are loans that investors make to corporations and governments. By investing in a bond, you are lending a specific sum of money to the bond Issuer, who agrees to repay the loan by a specific (maturity) date, and to make regular interest payments (the coupon payments) until that date. Although they are often referred to as ‘fixed income’ investments, bond prices fluctuate with interest rates. When interest rates rise, bond prices fall and vice versa.
Stocks represent partial ownership in a public corporation. When you buy stocks, you own a stake in the company. If the company prospers, you share in its profits, usually in the form of dividends* and a higher share price. Stock prices tend to fluctuate rapidly and often sharply in reaction to company earnings and analysts’ ratings.
*DIVIDEND = a taxable payment declared by a company’s board of directors and given to its shareholders out of the company’s current or retained earnings.
COMMENT – Past performance is no guarantee of future performance, even for market indices and mutual funds. For this reason, it is always best to diversify an investment portfolio among different asset cl. Mutual funds pool the money of small and Large investors. Portfolio diversification enables risk to be reduced and higher investment returns to be potentially realised.
Mutual Funds evolved from the demand for professionally managed stock investments. Mutual funds pool the money of small and large investors and entrust it to the care of a professional asset manager. The asset manager invests the pooled money in select securities, following a strategy of diversification. The majority of mutual funds are equity funds, but there are also bond funds and money market funds. Mutual funds offer substantial benefits. With only a small contribution, investors have access to a professionally managed, diversified portfolio at moderate cost. Most mutual fund managers are measured relative to their benchmark index. An equity fund for example may be benchmarked to the S&P500 Index. A disadvantage is that they depend strongly on the general market situation and rising markets.
Private Equity/Venture Capital managers invest in companies that are not publicly traded and range in size from small start-ups to already established companies planning to expand. Managers may simply invest their clients’ money in such a company, or the private equity managers might take an active role in running the company they invest in to realize its full potential. Private equity requires professional management, since this form of investing involves substantial risk.
Real Estate means investing in commercial buildings, housing, farmland, and timberland. REITs (Real Estate Investment Trusts) may be used if the investor prefers to have a professional manager choose the appropriate investment. Real estate investments may be a great diversifier in a typical portfolio of stocks and bonds, although the investor must have a sound knowledge of the industry. Investments in farmland and timberland are considered risky.
COMMENT - If an investment depreciates, the investor loses money. The broader the mix of investments in a portfolio, the more the overall risk is reduced if a single investment does not reach the expected performance.
Hedge Funds & Managed Futures Funds are some of the most recent forms of financial investments. Both asset classes are often used to reduce the risk of an existing portfolio. Unlike traditional investments, hedge funds and managed futures fund managers can pursue a variety of trading strategies and do not compete against an index but instead strive to make a profit in any market climate. Hedge funds and managed future funds are not without risk and because of their innovative structure, it is important to understand how they work before making the decision to invest in them.
N.B. INVESTMENT FUND MANAGERS of traditional investment funds general don’t have much flexibility about which financial instruments they can invest in, or to what extent, and more often than not, they find themselves in a legal straightjacket. Thus, an equity fund manager can only produce profits when equities are rising. Managers of hedge funds and managed futures funds, in contrast, are far less constrained by the market environment.