What are some different types of investments? - Blog - BetterSaver
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What are some different types of investments?

April 4, 2022

Investing can seem complicated, but it doesn’t have to be. Investing is simply putting your money into things that you expect to grow in value and generate income over time.

The advantage of investing versus a savings account is that your money has greater potential to grow over time. Thanks to compound returns, the more time your money is invested, the more it can grow. The sooner you start investing, the better chance you’ll have of achieving your financial goals in the long run.

It’s important to note that all investing has some risk. While we all wish we had a crystal ball to see the future, the reality is that it’s impossible to truly know what’s going to happen with an investment. Looking at data from the past can be helpful in assessing risk, though it still can’t produce any guarantees.

This list is by no means exhaustive, but can be a good starting point for understanding some investments you might be a bit less familiar with. Most Kiwis understand how property investment works, so we’re not going to cover that. Likewise, commodities like gold and oil can be interesting, but they’re quite different to the items below, so we might cover them another time.

KiwiSaver

What it is: KiwiSaver is a type of managed fund designed to help Kiwis be better prepared for retirement. Your KiwiSaver fund is invested on your behalf. Which fund is best for you depends on what you want to use it for (retirement or first-home deposit) and your values and ethics.

How it works: You are automatically enrolled when you start a new job, and your contributions are deducted from your pay at a rate you choose. Your employer is required to match your contributions by at least 3%. Plus, if you contribute enough each year, the government will add to your fund - literally free money.

Risk: Fund types are categorised by risk level, going from low-to-high risk we can generally split these into defensive, conservative, balanced, growth and aggressive funds. If you are automatically enrolled in KiwiSaver, you will be assigned to a default fund. This is intended to be a temporary fund for your money to be invested while you figure out which fund to pick for yourself. With over 300 KiwiSaver funds available, it can seem daunting to choose, so BetterSaver’s Fund Finder quiz is a lifesaver - we’ll give you a recommendation for a fund that suits your needs in as little as five minutes.

Managed Funds

What it is: Managed funds - also known as investment funds or mutual funds - are a collective investment scheme. This means multiple investors put their money in one pool and allow money managers to invest it on their behalf in a mix of assets like shares, bonds, property, and cash.

How it works: Your fund manager invests in a diversified portfolio, so your risk is spread out across a variety of investments - if one underperforms, you are protected by the other investments remaining steady or growing. Because it is managed by a professional, you don’t have to worry about knowing the ins and outs of investing.

Risk: Each fund manager has its own investment approach and risk levels. The key thing with managed funds is to choose one that aligns with your goals and risk tolerance.

Shares

What it is: Shares are a measurement of stock. Companies sell stock to raise money, and it is purchased in shares. When you buy shares, you purchase a part of a company and its assets.

How it works: If the company does well, you can earn money through dividends paid to shareholders or by selling your shares for a higher price than you paid. If the company you invested in doesn’t do well, the share price falls, and you stand to lose money.

Risk: Picking one share that will make you wealthy is highly unlikely and risky. As the saying goes, you don’t want all your eggs in one basket. To minimise risk, you need to diversify your investments and invest for the long term. DIY share trading can be time-consuming.

Bonds

What it is: A bond is a loan to a large company or the government in exchange for interest payments. A typical bond will have a face value(the value at which it is issued), a coupon rate (the rate of interest it pays) and a set maturity date.

How it works: When you invest in a bond, you will receive regular interest payments. If you hold your bond until maturity, you will get repaid the face value of the bond. If the bond is listed to trade on an exchange like the NZX, it may trade above (at a premium) or below (at a discount to) its face value. If you sell it before maturity, you could either get more or less than the face value.

Risk: Bonds are a relatively low-risk investment, less volatile than shares. The biggest risk is if the company defaults on the bond by failing to make their payments, you don’t get paid. Also, high inflation rates lower the value of the interest you earn.

Index Funds and ETFs

What it is: Index funds are managed funds that match (or track) a market index like NZX or S&P 500. They don’t try to beat the market, just replicate it. They can only be traded at the end of the day. ETFs (Exchange Traded Funds) are a form of index fund which can be traded throughout the day, making them a more liquid investment.

How it works: The fund manager comprises a portfolio of a large group of assets that will mimic a market fund. These are passively managed funds so generally have lower fees.

Risk: Index funds and ETFs are highly diversified, so there is less risk than if you just own shares in a few companies. However, they will go up and down in line with the market, so your investment may lose value in times of sharemarket volatility.

Cryptocurrency

What it is: Cryptocurrency is digital currency - it’s not physical like a dollar, and not issued by a government or central bank. Bitcoin was the first cryptocurrency and there have been thousands created since.

How it works: The idea is to revolutionise the world of finance by creating a means of transactions that don’t depend on institutions like banks. So, it is faster, cheaper, and independent of bank failures.

Cryptocurrency is managed in a digital ledger (called a blockchain) that is highly encrypted to protect transactions, making it nearly impossible to counterfeit.

Risk: Cryptocurrency is highly volatile, with performance changing significantly day-to-day. Because it is a new field that’s largely unregulated, new regulations (around legality or tax laws, for instance) could quickly impact the value or even make cryptocurrency worthless, so we consider it a high-risk investment.

NFTs

What it is: NFT stands for “non-fungible token.” Basically, an NFT is a digital asset that represents something unique, like a piece of art or music. The NFT is public proof of ‘ownership’ of that individual asset, though the level of actual ownership varies depending on what the asset is, and how the creator of that asset has decided to offer it.

How it works: Think of investing in NFTs as more similar to collecting (like Star Wars action figures or trading cards) than purchasing stocks or bonds. You want to own something rare that other people want, making it valuable. NFTs are purchased from artists or creators or at auctions with the hope that they gain value over time so that you can sell them for a profit.

Risk: You need to be comfortable with crypto before NFTs as an investment. The value of an NFT is only as much as the next person is willing to pay for it, and while they are trendy now there is no guarantee they will be in future. Someone could also impersonate an NFT artist and sell you fake art. While an exciting gamble, it carries a high level of risk.

Talk to a financial adviser

No matter what type of investment you choose, it is critical to consider your goals, timeline and acceptable risk. Sorted’s investor kickstarter is a great tool to start with - answer a few questions and get an idea of what type of investor you are and what investments might suit you.

Financial advisers devote a lot of time to research this stuff - more time than you likely have. They take a look at your personal situation, help you set goals and make a solid plan to reach them. All you have to do is be honest and check in from time to time so they can make sure you’re still making the best choices.

If you want to find out what kind of investing is right for you, we recommend talking to a financial adviser. If you’re not sure where to start, get in touch with our team.