Types of investment instruments
While it is important to save for a rainy day, we should also consider making hay while the sun shines. With relatively low interest rates for savings accounts, you may want to consider other options for growing your wealth.
They are commonly known as shares on a stock market. When you buy a company's shares, you essentially own a part of the company.
There are two ways investors can make money from shares.
Firstly, it can happen through dividends, as portions of a company's earnings are distributed to shareholders. At the end of every financial year, the company would state how much dividends it would issue for each unit of shares.
For example, if the dividend is set at $0.50 per share and if you own 1,000 shares, your payout will be $500.
Some choices are known as “blue-chip” stocks. These are stocks of large companies that have long histories of profitability, established businesses, respected brand names, and are recognised by analysts as “financially sound”.
Some speculative investors may regard “blue-chip” stocks as “boring” because their share prices tend not to experience big swings. But more conservative investors value blue chips precisely because of that relative stability, compared to the volatility of smaller companies.
The second way to make money from “blue chips” is through share price gains over time. Blue-chip company share prices generally – not always – tend to gain over the long-term.
REAL ESTATE INVESTMENT TRUSTS (REITS)
They allow you to invest in various property segments, including office, retail, hospitality and industrial sectors.
Compare this with buying your own property and renting it out, which may let you earn a high monthly profit, but the initial investment would likely be at least a six-figure sum.
REITs, however, give you the opportunity to invest and own a piece of real estate asset for a small sum. You can also own shares in more properties without having to tie down a large sum of money to a single property investment.
REIT investors usually get regular pay-outs in the form of dividends, which come from the profits made through rental income or sale of these properties.
When you invest in a unit trust, you pool your money with other investors. The manager overseeing this pool will use the funds to invest in a wide range of investments with different degrees of risk and levels of returns.
A big advantage of unit trusts is the diversification that they offer for relatively small sums of investment.
That diversification means the investor can usually get exposure to more than 50 stocks for a small investment. So even when one stock in the unit trust’s holdings does not do well, other investments can offset that with hopefully better performances.
A bond is a loan instrument. A company which issues a bond is effectively asking for a loan from investors. And because you lend money to the company, it promises to pay you back with interest. There are short-term bonds which last for only a year or two, and long-term ones which can stretch for 10 years or more.
Typically, the longer the duration of the loan, the higher the rate of interest the company pays.
EXCHANGE TRADED FUNDS
This is another vehicle in which your funds are pooled with other investors’ to invest in stocks which are listed and traded on a stock exchange.
Exchange Traded Funds (ETFs) are passive as they copy the performance of specific indices such as those for stocks, commodities or bonds.
The manager handling the ETF does not try to outperform the index it is following. As such, the ETF’s charges and fees are usually lower than investment funds which are actively managed by a fund manager.
Different ETFs have different investment objectives stated and you can choose the fund that suits your purpose.
INVESTMENT-LINKED INSURANCE POLICIES
Many Singaporeans have insurance policies to ensure their protection needs are met.
Investment-linked Policies (ILP) are insurance policies which come with an investment component, in addition to a protection element.
The insurance premiums are used to invest in specific eligible fund(s) of your choice in the form of units. Some of the units you buy are then sold to pay for insurance and other charges, while the rest remain invested.
With so many investment vehicles to choose from, you may not wish to leave all your money in a savings account. But before you take the plunge, do familiarise yourself with the pros and cons of each investment type, so that you can pick those that suit your needs and investment style.
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