What is an Investment Vehicle?
An investment vehicle is a financial product designed for investors to generate positive returns. These vehicles can vary greatly in risk and reward—from low-risk options like certificates of deposit (CDs) and bonds to higher-risk investments such as stocks, options, and futures. Other investment vehicles include annuities, collectibles like art or coins, mutual funds, and exchange-traded funds (ETFs).
Investment Vehicles Demystified
Investment vehicles are essentially methods through which individuals or businesses allocate funds with the goal of growing their money. The broad spectrum of investment vehicles offers numerous choices, and diversification within a portfolio can help to minimize risk and maximize long-term returns.
Types of Investment Vehicles
Investment vehicles are regulated based on the jurisdiction in which they are offered. Each type comes with its unique risks and rewards. Selecting the appropriate vehicles for a portfolio should consider the investor’s market knowledge, financial investing skills, risk tolerance, financial objectives, and current financial standing.
Key Takeaways
- Investment vehicles are utilized by investors to earn positive returns.
- They range from low-risk (like CDs or bonds) to high-risk (such as options and futures).
- Examples include lending investments (bonds, CDs), cash equivalents, and pooled investments (pension plans, hedge funds).
Ownership Investments
Ownership investments involve holding assets that are expected to depreciate in value over time. These investments can be stocks, real estate, precious objects, and businesses. Stocks, also referred to as equity or shares, grant investors a stake in a company and its profit. Real estate provides profits through rental income or resale value. Collectibles such as art, precious metals, and other valuable items, if sold profitably, fall under ownership investments. Businesses built to provide products and services for profit are another form of ownership investment.
Lending Investments
Lending investments enable individuals to lend their money to others with the expectation of getting it back with interest. Low-risk and typically offering low rewards, examples include bonds, CDs, and Treasury Inflation-Protected Securities (TIPS). Bonds allow lenders to provide money to corporations or governments at a fixed interest rate. CDs are promissory notes provided by banks that offer an interest return without liquidations for a set period. TIPS are bonds from the U.S. Treasury designed to safeguard against inflation, providing what was borrowed plus interest.
Cash Equivalents
Cash equivalents are as strong as having cash in hand, and include savings accounts and money market funds. While highly liquid, these investments also tend to offer lower returns.
Pooled Investment Vehicles
Pooling together resources can provide investors certain benefits that wouldn’t be possible individually. Common pooled investment vehicles include mutual funds, pension funds, private funds, unit investment trusts (UITs), and hedge funds:
- Mutual Funds: Managed by professional managers who allocate the portfolio across various assets for the investor.
- Pension Plans: Funded by both employer and employee contributions, these serve as retirement accounts.
- Private Funds: These include hedge funds and private equity funds and are not overseen by the Securities and Exchange Commission (SEC).
- Unit Investment Trusts (UITs): They offer fixed portfolios for a specified term and are redeemed in units.
- Hedge Funds: Typically involve high-risk, high-reward strategies for substantial returns.
Concluding Thoughts
Investment vehicles are plentiful, yet selecting the right ones requires understanding the associated risks. A financial advisor is best positioned to help evaluate an investor’s financial status, objectives, and needs, eventually crafting the optimal portfolio and investment strategy.
Related Terms: portfolios, diversification, bonds, stocks, mutual funds.
