Most investors know the value of diversification and thus understand the importance of investing in different asset classes and sectors. This could mean investing some of your wealth in cash and some in property. Or maybe some in equities and some in gold. Knowing what areas are available to invest in is the first piece of the puzzle, the second being how to invest. In this article we wil discuss the various investment vehicles available to investors to help them access the returns and yields available from the universe of assets and securities.
Direct Investing
An investment directly into an asset or security gives the investor ownership over part or all of an asset. This may be an equity share in a company, or a bond from a Government or business. It may be a deed over a property or the physical storage of some commodity. It may also be a right to one of these assets in the form of an option or other derivative. But overall, you are the owner of that security and manager of that investment.
The main types of direct investment vehicles are:
- Shares (including options)- These are generally listed on stock exchanges and gives the investor an ownership in the underlying company and a share in its fortunes;
- Property - This is often a big investment in a residential or commercial property with rents received from tenants;
- Cash/TDs - This is a deposit into a yielding account at a bank;
- Commodities (including futures) - Gaining exposure to this asset class usually takes the form of a futures contract over a commodity such as oil or gold.
Indirect Investing
An indirect investment usually gives an investor exposure to 1 or more assets through units in a managed fund or trust. This could be an investment in a diversified pool of shares or other investable securities. Indirect investing generally broadens the range of investable assets and securities, and also gives investors access to the skills and experience of others.
The main types of indirect investment vehicles are
- Managed Funds - These are set-up in order to pool investors funds together and then utilise the experience and research capabilities of a fund manager to invest into various securities. Through managed funds investors can gain access to individual asset classes, or can have their money invested across multiple areas through a diversified fund. Also, these can be either "open" (accepting new investors) or "closed" to new investors. Furthermore, managed funds can be either "index" (track an index) funds or "active" (manage exposures based on research , experience, etc) funds;
- Exchange Traded Funds - These have traditionally been index funds that are listed and traded on the stock exchange. Newer listed funds will are more "active" and are essentially managed funds that can be bought and sold on the stock exchange rather than simply by a distributor or investment platform;
- Real Estate Investment Trusts/Listed Investment Companies - These are essentially "closed" funds, listed on the stock exchange, with the former mainly focussed on a portfolio of direct property holdings and the latter invested into a portfolio of listed shares and other securities.
So whether you want to manage a portfolio or exposure yourself, or have someone do it for you, it is important to understand the different ways in which you can gain the exposures you are looking for, before deciding on which vehicle to choose. Due to minimum investment sizes and other transactional issues, utilising an indirect investment vehicle can assist in gaining good diversification without the cost and hassle.