Investments are generally grouped into four main categories, or asset classes: equities, bonds, property and money market investments (including cash). There are also specialist and other types of investments, including commodities – that’s another word for things like gold, oil, minerals, etc.
Each asset class has its own potential returns and risk
Different types of investments behave in different ways. They have their own characteristics and react differently to factors such as world events, politics, economics and interest rate moves. Some are more volatile – their value rises and falls to a greater extent – than others.
So asset classes have different levels of risk and potential returns. As you can see below, there’s a trade-off - usually you have to take on more risk if you want to aim for higher returns.
- Money market
Deposits with banks and building societies, governments and large corporations. Also includes investments that can have more risk and return than standard bank deposits.
Essentially loans to a government or company, often for a set time period and the bond owner usually receives regular interest payments.
Learn more about Bonds
Direct investments in buildings and land, and indirect investments such as shares in property companies (property securities).
Learn more about Property
Other investments that don't fit into one of the other asset class categories including direct and indirect investments in real assets like commodities (oil and precious metals). Also investments with specialist characteristics, such as absolute return investments that aim to have a positive return regardless of market conditions.
Usually known as stocks or shares, equities are part ownership in a company.
Learn more about Equities
How much should I invest in each asset class?
The amount you allocate to each asset class is known as asset allocation. If you invest in only one or two asset classes then you’re exposing yourself to quite a lot of risk. That’s why many people choose to invest in a variety of investments to achieve the best balance between risk and return – known as diversification.
But it can be difficult to build a truly diversified portfolio without the knowledge and tools available to professional investors. So, while it is possible to invest direct in the different asset classes, many people decide to invest via a ready-made diversified fund instead.
Investing through a fund
Investing through a fund means that your money is pooled with other people’s money. There are several reasons to consider doing this. You’ll get:
- The opportunity to put your money into a wider range of investments than if you invested directly yourself
- A professional fund manager deciding what to buy, based on what the fund is aiming to do
- Lots of choice: as well as funds which invest in a selection of different asset classes and regions, there are others which invest in just one asset class or region
- Potential for greater diversification – some funds not only diversify across traditional investments and regions, but also use more complex and sophisticated investment strategies that aren’t usually available to individual investors
- To choose investments to suit how you feel about risk. Many funds are rated by how much risk they take, so you can make sure you don’t take more risk than you’re comfortable with
The value of the investments in any asset class can go up or down, and they may be worth less than you paid in - there aren't any guarantees.
The information contained here should not be regarded as financial advice. The right option for you will depend on individual circumstances.