Different types of investment

Blog March 2024

The basics

The most common question that is asked before getting started or halfway through the investment process is the types of investments and how to diversify into them. Here we touch on the basics to understand the different investment options and their nature.

Investment types based on outcome and risk

Investments can be typically categorized into 2 based on the nature and outcome of the investment.

Growth investment

As the name implies, the emphasis is to grow the invested value with low- medium risk. Preferred mostly as a medium or long term investment the risk mostly is the market condition that might even eat into the principal amount invested.

Defensive investments

Investments that prioritize safety over returns come under defensive investment.

They are available both short term and long term and make sure the principle is safe irrespective of the market’s ups and downs. Defensive investments usually have comparatively low return rates than growth investments but the risk on principal value is low or zero.

Five main asset classes

The investment medium or method is where your money goes and what you get in return for the money – shares in the company, bonds, certificates, assets, etc.

Every type of investment is based on one among the following ways or combinations of it

(i) Lending money for interest, (ii) holding part ownership of a business, or (iii) buying assets that tend to increase in value over time or give regular returns in the form of rent.

Now to the 5 important and traditional types of investments are:

Cash

Cash investments are more of a savings medium than investment, hence coming under defensive investments. Savings bank accounts, term deposits are the common cash investment.

The principal amount is loaned to the bank for a period of time for a predetermined rate of return in the form of a deposit. Fixed-term deposits are imposed with a penalty or reduced returns when withdrawn before the maturity period.

You usually get a certificate of deposit or have access to the money itself in the case of a savings account. Cash offers the lowest interest rates of all investment methods but zero risk on principal investment, making it the safest investment.

Though not a highly envied investment option for most, it is considered a vital part of investment diversification due to its low risk and instant accessibility.

Fixed interest

The most common fixed interest investment is government bonds and institutional bonds. Your money is lent to an institution for a fixed rate of return.

In exchange for the money lent, you get a bond as debt security. These are usually fixed and long-term. Classified as a defensive investment, the return is usually better than Cash but not as attractive as growth investments.

The combination of low interest and long hold period makes it the least opted asset class for individual investors. But institutional investments like retirement funds and long-term investment corpora majorly rely on bonds for defensive investment in their portfolio.

Shares

Shares are the most common of the growth investment due to their high gains and flexibility. Though only 10-15% of individuals in the US have directly invested in the stock market, about 52% have some kind of investment over it through pension funds, mutual funds, etc.

Shares, also known as equity and stock, is owning a micro-part of the company that is publicly traded in an exchange. These equities change in value depending on the performance of the company which means growth of principal, hence classified growth investment. There is no fixed return rate or fixed lock-in period.

Though the risk is high, most companies are growing, in the long run, averaging a 10% return per annum. Plus owning a share also entitles you for the dividend payout by the company (Profit passed on to the shareholder).

Investing in shares, though considered high risk, is a viable option to grow faster if you know the game in and out.  There are a lot of strategies to diversify your share portfolio alone to maintain steady growth and mitigate risk.

If you don’t have the appetite for risk or don’t have the time for the footwork, mutual funds, index funds, and ETFs might work for you.

Property

Property, commonly known as real estate investment is a growth investment that has 2 significant money-making opportunities – (i) monthly rental income & (ii) Property value depreciation.

Commonly known as high-risk, is one of the reliable investment mediums due to the scarcity of land and ever-rising demand.

Traditionally, real estate investment is the least explored by individual investors due to its difficulty in finding the best bet and maintaining the property.

But there are other ways you can reap the benefits of real estate without getting your hands dirty. Real Estate Investment Trust (REIT) and Private Equity Real Estate Investment Vehicles are two ways you can invest in real estate indirectly and let them manage your funds.

The large volume of investment and internal diversification helps reduce the risk to a great extent. Surprisingly, millennials are showing more interest in investing in real estate than in shares.

Commodity

Commodity investing is one of the rarest of the 5 main asset classes. It is directly buying tangible commodities like gold, silver, oil, and agricultural products or purchasing sovereign gold bonds (equivalent to owning gold without the risk of safe storage).

Commodities are mid-high risk depending on the vehicle of investment and have the potential to grow the value invested, hence a growth investment.

One more thing! – Cryptocurrency

The newest investment medium, the hot topic of government regulatory boards, millennials, and get-rich-quick shenanigans is cryptocurrency.

Originally devised to break the central control system (bank, government) in the cash flow and creation is now a money-making or losing mine for many.

Be warned this can make a fortune of 100x if you choose the right crypto investment. But right now, it has no reason to boom other than the hope of cryptos having a practical use in the near future.

Very high risk and volatile investment but it wouldn’t hurt to put a tiny chunk of your investment that you can afford to lose into some crypto. Be warned, it could be a bubble similar to the “dotcom bubble of the 90’s”.

Now that you understand how each of the investments works, now start accessing the risk-reward ratio and plan your money needs for the coming years to come up with an investment portfolio that will serve you best. Need help in setting up a diversified investment portfolio? We have got you covered.

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FAQ

Any questions

What is affordable housing?

Affordable housing refers to housing units designed to be accessible to low- and moderate-income families, typically costing no more than 30% of their gross income.

The definition of “affordable” typically varies depending on location and income levels but generally encompasses rent or purchase prices that don’t exceed a certain percentage of a household’s income.

What is Section 8 housing in the US?

Section 8 is a federal rental assistance program in the US run by the Department of Housing and Urban Development (HUD) that helps low-income families and individuals afford decent and safe housing in the private market. 

The program provides eligible households housing choice vouchers that cover a portion of the rent directly to the landlord, with the tenant paying the remaining amount. Property owners who participate in Section 8 agree to rent units to qualified individuals and families at a rate approved by the program.

How can I invest in Section 8 housing?

There are several ways to invest in Section 8 housing:

  1. Direct ownership: You can purchase a property approved for Section 8 and rent it to a qualified tenant using a voucher and receive rent subsidized by the government.
  2. Real estate investment trusts (REITs): REITs pool investor funds to purchase and manage income-producing real estate, including affordable housing.
  3. Limited partnerships: Limited Liability Companies (LLCs) offer another option for investors to pool resources and invest in affordable housing projects.
What is the difference between multi-family and single-family properties?

Single-family property: This refers to a standalone house or unit designed for and rented to one household.

Multi-family property: This refers to a property containing multiple dwelling units, such as a duplex, apartment building, or condominium complex. Multi-family properties offer the potential for higher rental income but typically require different management strategies and considerations compared to single-family homes.

What is the difference between buying and flipping houses?

Buying and holding: This involves purchasing a property to keep it as a long-term investment, generating rental income and potentially appreciating in value over time.

Flipping: This involves buying a property, renovating it to increase its value, and then selling it quickly for a profit. This is a more hands-on strategy with higher risks and rewards compared to buying and holding.

How much do I need to start investing in affordable housing real estate?

The minimum investment required varies depending on the chosen method. Direct ownership typically requires a higher initial investment for the property purchase, and renovation up to Section 8 standards, while other options like REITs might have lower minimum investment amounts.

Do I need to be a US citizen to invest and own the property?

No, US citizenship is not a mandatory requirement for investing in affordable housing in the US. However, specific restrictions or regulations might apply depending on the investment method and your residency status.

It’s crucial to consult with a professional to understand the legal and tax implications for non-citizens.

Do I need to pay US tax as an overseas investor?

This depends on the type of investment, your residency status, and any applicable tax treaties between your home country and the US.

Consulting with a tax professional specializing in international investments is highly recommended.