c
  refers to the concept of deferred consumption, which involves purchasing

an asset, giving a loan or keeping funds in a bank account with the aim of generating
future returns. Various investment options are available, offering differing risk-reward
trade offs. An understanding of the core concepts and a thorough analysis of the
options can help an investor create a portfolio that maximizes returns while minimizing
risk exposure.


 
 
The various types of investment are:

Cash investments: These include savings bank accounts, certificates of deposit (CDs)
and treasury bills. These investments pay a low rate of interest and are risky options in
periods of inflation.

Debt securities: This form of investment provides returns in the form of fixed periodic
payments and possible capital appreciation at maturity. It is a safer and more 'risk-free'
investment tool than equities. However, the returns are also generally lower than other
securities.

Stocks: Buying stocks (also called equities) makes you a part-owner of the business
and entitles you to a share of the profits generated by the company. Stocks are more
volatile and riskier than bonds.

Mutual funds: This is a collection of stocks and bonds and involves paying a
professional manager to select specific securities for you. The prime advantage of
this investment is that you do not have to bother with tracking the investment. There
may be bond, stock- or index-based mutual funds.

Derivatives: These are financial contracts the values of which are derived from the
value of the underlying assets, such as equities, commodities and bonds, on which
they are based. Derivatives can be in the form of futures, options and swaps.
Derivatives are used to minimize the risk of loss resulting from fluctuations in the
value of the underlying assets (hedging).

Commodities: The items that are traded on the commodities market are agricultural
and industrial commodities. These items need to be standardized and must be in a
basic, raw and unprocessed state. The trading of commodities is associated with
 high risk and high reward. Trading in commodity futures requires specialized
knowledge and in-depth analysis.

Real estate: This investment involves a long-term commitment of funds and gains
that are generated through rental or lease income as well as capital appreciation.
This includes investments into residential or commercial properties.

˜
 

 c
 

There are many different types of investment. Broadly speaking, they fit into four asset classes:

Short term deposits

Bonds

Property

Shares
Within each asset class there are investments to suit different kinds ofrisk, 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 below. To see what type may suit you, try
our Investment recommender.

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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.

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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.
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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.

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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.


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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 ³you 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 ofdiversification.

Also take a look at direct investment in property.

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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.

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.

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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.



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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 ourchecklist for financial advice to help you
get good professional advice.

Types of Investments
There are many types of investments that will ensure you a safe and secure financial future. While
investing money may not be rocket science, it definitely is a science that takes time, effort, and
perseverance to master and produce true results. In this article, we cover the following types of
investments:

Liquid Investments

Liquid investments are investments that could be turned into cash relatively easily and assume
various forms, such as savings accounts, Certificates of Deposit, Money Market Accounts, and other
interest-bearing accounts offered by banks. Normally, these types of investments are FDIC-insured
and although they offer low rates of return, they are relatively less risky.

Bonds

Under the broad umbrella of bonds, we cover both savings bonds (Treasury Bonds) offered by the
US government and corporate bonds issued by private corporations. The US Treasury is the largest
issuer of savings bonds and normally these are very secure investment vehicles, given that they are
backed by the United States Government ² Uncle Sam. These savings bonds are easily sold at
most banks and can also be directly purchased from the Treasury Department online. As
investments, the savings bonds are safe and stand by their promise of providing fixed interest rates.

In addition to government bonds, corporate bonds represent another major chunk of investment
vehicles. Normally, corporate bonds are rated by independent agencies based on the level of risk
associated with their issuer. Much like government savings bonds, they are relative safe but do carry
some risk, given that they are issued by private corporations ² which are subject to loss,
bankruptcy, and other risk-producing eventualities.

Annuities

The nuts and bolts of an annuity boils down to some very basic contracting. You, as the investor,
pay a lump sum amount to the annuity issuer, typically an insurance company. At a pre-defined
period, typically your retirement, the annuity would mature and start paying you a fixed amount every
month. The advantage of an annuity is that you will not have to pay taxes until the annuity payments
actually start accruing to you. Although considered low risk, annuity provides charge high fees and
their success is largely dependent on the reputation and stability of the insurance company
underwriting the annuity.

Stocks

A stock normally represents your ownership within the corporation. The advantage of holding a stock
is that not only do you own a piece of the company, you also have the liberty to trade these
instruments in an open market (and thus realize capital gains) and reap income in the form of
dividends, which are declared when the company makes profits. Stocks, as an investment class, are
very volatile and may be subject to sharp market fluctuations and uncertainty.

Mutual Funds

Mutual funds are a large aggregation of stocks, bonds, and other financial investments, except that
they are managed by professional investors. The advantage of mutual funds is the possibility of
diversifying your financial investment over a large pool of investments. Unfortunately, it is not easy to
predict the risk and rate of return through mutual funds and depending on the professional expertise
of mutual fund managers, the success is likely to vary.

Real Estate

For those who keep track of the real estate market, buying, selling, and renting property could be a
viable financial investment. Not only will you realize capital gains if you invest in the right property,
there is also the possibility of earning rental income. If you had purchased your property relatively
early in your career, at retirement you may have paid off the property¶s mortgage and so whatever
rental income accrues is basically your profit (minus, of course, maintenance).