There are basically
3 broad types of investment options:
1. Debt - Low risk, 6 - 12% returns
2. Equity - High risk, returns linked to market performance
3. Commodities/bullion and such - Low risk, low returns
Under debt you have:
Bank Fixed Deposits/Recurring Deposites - good if you are in lower tax brackets
Fixed Maturity Plans (FMP's)- good for high income people, better than FD's
Provident Fund/NSC/Government Bonds - not recommended due to long lock in periods
Under Equity there are-
Mutual Funds, ETF's, Index Funds, Stocks
Bottom line is - If you want to preserve your capital and earn modest returns and plan to withdraw money in a year or two, invest in Debt funds, Invest into Equity if you can stomach the risk for higher returns, and don't plan to touch the investments for long time (> 3-5 years)
And please don't make the mistake of mixing investments with insurance. Don't by ULIP's as an investment option - you will only repent later.
2. Equity - High risk, returns linked to market performance
3. Commodities/bullion and such - Low risk, low returns
Under debt you have:
Bank Fixed Deposits/Recurring Deposites - good if you are in lower tax brackets
Fixed Maturity Plans (FMP's)- good for high income people, better than FD's
Provident Fund/NSC/Government Bonds - not recommended due to long lock in periods
Under Equity there are-
Mutual Funds, ETF's, Index Funds, Stocks
Bottom line is - If you want to preserve your capital and earn modest returns and plan to withdraw money in a year or two, invest in Debt funds, Invest into Equity if you can stomach the risk for higher returns, and don't plan to touch the investments for long time (> 3-5 years)
And please don't make the mistake of mixing investments with insurance. Don't by ULIP's as an investment option - you will only repent later.
Investment types
Within each asset class there
are investments to suit different kinds of risk, duration, returns and
liquidity. There are also different ways of investing. You can take the 'DIY'
route and invest directly in one or more of the
asset classes. Or, you can invest in a managed fund where fund managers make a
wide range of investment decisions for you.
You can get a brief description
of each type of investment here.
Bank savings accounts
The simplest kind of short term
(or cash) investment is a savings account. Returns are low compared to other
investments, but returns are guaranteed by the bank - so your investment won't
drop in value in the short term like others might. You can withdraw part or all
of your money whenever you want (total liquidity). This makes them ideal for
short term savings goals, or as a place to keep your emergency fund - They're
not a good investment option for medium or long term goals.
Bank fixed term investments
You give the bank a lump sum for a
set period (a fixed term) usually three, six or 12 months. Your money is locked
away for the fixed term. In return, you get a higher interest rate
than you could get in a straight savings account. You may be able to withdraw
your money, but you will get a lower rate. These can be a good short or medium
term investment, depending on interest rates. Interest rates are
always changing - sometimes they go through a 'high phase' - this is usually a
good time to have money on fixed term deposit.
A bond is like an IOU issued by
a government or a company. You give them money for a certain period, and they
promise to pay a certain interest rate and re-pay you on maturity. Bonds lock
your money away for a set period of time, but they can sometimes be traded.
Generally, they aren't a good short term investment. Small investors don't
usually invest directly in bonds, it's more usual to go through a managed fund.
Finance company debentures are
a kind of bond. These are not usually able to be traded. Finance companies come
in many shapes and sizes, and the risk of their investments varies as well.
For most New Zealanders, their
home is their largest asset. But you need to separate your
emotional ties to your home from your investment objectives. Think about how
much of your net worth is tied up in your home. Would
it be wiser to buy a smaller house and spread your money across other
investments as well? Check out how your home fits into your retirement plan.
Rental property
Owning property rented to
individuals or businesses can be a safe and profitable investment. Returns from
property investment come from rental income, after deducting expenses, and from
the increase in the value of property over time.
People debate whether property
is a better investment than shares. What’s important to remember is that
they’re different forms of investment. If well managed both can provide good
long-term results. If not, and without the right knowledge and attention,
investment in shares and property can result in significant losses. It’s easy
to see losses on the share market because the prices are available almost
daily. Losses on property investment are generally not published, so don’t
believe anyone who suggests “you can’t go wrong with property investment”.
We don’t encourage anyone to
rush into investment in shares in particular companies or investment in a
particular property. Unless you’re prepared to put the time into understanding
and managing the many aspects and issues of property investment, then we
suggest you leave it to others.
That’s not to say you can’t
benefit from property as an investment. There are several different ways in
investing in property - directly or indirectly.
If you’re interested in direct
property investment, you can manage the day-to-day administration of your
rental property yourself, or use a property management company to do it for
you. A property management company takes on the tasks of finding tenants,
collecting the rent and bond monies, and attending to maintenance issues etc on
your behalf. The fees charged for these services are usually a percentage of
the rental income.
For an indirect property
investment, you can invest in a KiwiSaver scheme, private superannuation
scheme or managed investment fund that invests some of
your money in property. This could be by way of ownership of rented buildings
or by way of an investment in shares of public companies, which specialise in
property ownership.
This is another option that
gives you the many advantages of property ownership without having to find the
property and do the hands on management yourself. This type of indirect
property investment also makes it easier for the average investor to get the benefits
of diversification.
By investing in shares in a
public company listed on a stock exchange you get the right to share in the
future income and value of that company. Your return can come in two ways:
·
Dividends paid out of the profits made by the company.
·
Capital gains made because you're able at some time
to sell your shares for more than you paid. Gains may reflect the fact that the
company has grown or improved its performance or that the investment community
see that it has improved future prospects.
Of course shares can also lose
value.
Any loss or gain in value is
said to be 'realised' if you sell the shares right there and then. If you hold
onto them the loss or gain is 'unrealised'.
The price of shares in any individual public listed company can vary from day to day. On any day some shares may go up in value and some down, depending on how investors view the prospects of each company. And all of the listed company shares in a particular country or industry may increase or decrease in price because of rises and falls in economic confidence or changes in the particular industry. There are a range of complex factors which influence share prices on a daily basis and no one can accurately predict what price listed shares will be in the future.
We know from past experience that some companies will fail and some will flourish. Overall the long-term trend is for the value of listed companies to increase at a rate higher than inflation. Therefore by investing in a wide range of companies operating in a range of industries and countries, an investor has a good chance of making long-term gains. Remember that in assessing the return from shares you need to take into account dividends received as well as capital gains. You should also expect that the dividends from the shares that you own will increase over time.
The price of shares in any individual public listed company can vary from day to day. On any day some shares may go up in value and some down, depending on how investors view the prospects of each company. And all of the listed company shares in a particular country or industry may increase or decrease in price because of rises and falls in economic confidence or changes in the particular industry. There are a range of complex factors which influence share prices on a daily basis and no one can accurately predict what price listed shares will be in the future.
We know from past experience that some companies will fail and some will flourish. Overall the long-term trend is for the value of listed companies to increase at a rate higher than inflation. Therefore by investing in a wide range of companies operating in a range of industries and countries, an investor has a good chance of making long-term gains. Remember that in assessing the return from shares you need to take into account dividends received as well as capital gains. You should also expect that the dividends from the shares that you own will increase over time.
Because of the volatility of
share prices (ie the fact that in the short term they may go up or down) it’s
not wise to invest funds which you need in the short term, in shares. When you
need your money you’ll generally be able to sell your shares, but the price at
the time may be below your purchase price. Shares should be used as a long-term
investment.
Understanding the product range
explains how fund managers help investors find combinations of shares and other
products, which suit their needs.
Also take a look at direct investment to see why some
investors prefer to develop their own investment portfolios themselves.
You can invest directly in term
deposits, bonds, shares and property or you can place your money in a KiwiSaver
scheme, private superannuation scheme or managed fund and have full time
specialists look after the investment decisions for you.
For some people making their
own investment decisions and taking a more hands on approach gives them
personal satisfaction and saves them paying management fees. If you’re
interested in direct investment talk to an accountant or adviser.
Direct investment in shares in
specific companies or selected rental properties should only be undertaken if
you have detailed knowledge or are prepared to pay for specialist advice.
Particularly in the case of property investment, you need to be willing to
either spend the necessary time on administration and management, or to pay a
property management company to do this for you.
If you’re interested in direct
investment in shares you can start by talking to an adviser or NZX Market
Participant.
People who want to acquire
their own property investment generally have to rely more on their own
knowledge and judgement. It’s therefore important to read publications and
attend property investment seminars before making any decisions.
Issues you need to consider
include the location and type of property (eg city or rural, residential,
retail, warehouse, manufacturing, office or special purpose property such as
motels or carparking buildings etc), financing and taxation arrangements,
price, condition of property and maintenance requirements, lease terms,
selection of sound tenants, record keeping etc. Owning a property is like
operating a small business. Know the business, put time into the detail and
you’ve a good chance of doing well. Rushing in without doing your homework can
lead to disaster or at least a risk that you’ll lose some of your capital.
If you want to invest directly
in shares or property remember the importance of duration, risk, diversification, returns and liquidity.
In a managed fund your money is
pooled with other investors, and a professional fund manager invests it in a
variety of investments. Managed funds come in many forms - different funds
invest in different types of assets for different objectives. Some funds target
all-out growth and invest more in high risk shares than others - they could
rise dramatically or just as easily drop dramatically. These are funds for money
that isn't absolutely vital to your future plans. Other funds look for solid
long term growth from a range of deposits, bonds, and shares - a better place
for a lump sum intended for your retirement. Financial advisers, banks and
insurance companies can all advise you on managed funds that match your
investment needs.
Note there used to be a tax
disadvantage in investing in managed funds. However this is no longer the case
with managed funds that are PIEs (Portfolio Investment
Entities).
Managed funds allow investors
access to markets which would otherwise be difficult to invest in. For example,
managed funds let you invest overseas or in commercial property.
Managed funds usually involve
paying management and administration fees. These can vary a lot, so check to
see what you'd have to pay. Use our product comparison checklist to
compare several funds.
And whether you're investing
through a fund or directly, use our checklist for financial advice to
help you get good professional advice
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