The Best Types of Investment

What is the best type of investment? The short answer is ‘it depends’. There are a number of factors to take into consideration when investing a lump sum.

What is your investment time frame?

Your investment time frame ends when you need access to your investment capital rather than the income from that capital. In general, if you need your capital within five years, it will be best to put your money into an investment with a fixed value to avoid the risk of making a loss.

Do you need income from the investment?

Investments can produce a return by way of income (interest or dividends) or capital gain (increase in the value of the investment) or a combination of the two. Capital gain is usually only available to you when you sell the investment. Some income producing investments have a fixed rate of return (such as bank deposits or finance company debentures) and some have a variable rate of return (such as fixed interest funds or perpetual bonds). A fixed rate has the benefit of certainty of what your income will be, whereas a variable rate offers the possibility of higher returns if market conditions change favourably.

Do you want your investment to grow in value?

If your aim is to maintain the purchasing power of your capital or increase your wealth over time then your investment will need to grow in value by at least the rate of inflation. A diversified portfolio of shares or a property investment is arguably more likely to achieve this objective over the long term than a fixed interest investment.

How much do you want to invest and what other investments do you have?

Your total investment portfolio should be spread amongst different types of investments in order to reduce your risk – in other words, don’t put all your eggs in one basket.

How much risk is it appropriate for you to take?

Your age, the amount of money you have to invest, and your personal feelings about taking risk are some of the factors that will determine how much risk you should take with your investment. In general, the less risk you take, the lower your investment return will be. Make sure you know what risks are involved with your proposed investment and that the return reflects the risks.

What is your marginal tax rate?

Investments are taxed differently depending on how they are structured. If you are on either the lowest or highest marginal tax rate, some investments will be more tax effective for you than others.

Do you understand the proposed investment?

Investment products are becoming increasingly complex as different providers seek to outdo each other and attempt to increase potential returns without increasing risk. Be wary of investing in something that you don’t understand.

As you can see, the best investment for you is one that fulfills all the requirements that you have. What is best for somebody else may not be best for you. Be clear what your criteria are and then use them to evaluate a number of different options. If in doubt, get some good advice!

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