Cash
Your everyday bank account, online high interest account, term deposits and cash management trust are all classified as cash investments. Cash is a safe investment and give liquidity to your portfolio.Fixed interest
Bonds, bank bills, commercial papers, and other money market instruments are your fixed interest investments.
In simple words, organizations borrow money from you by issuing a paper which says at maturity, you will get your money (face value) back. Meanwhile, during the investment term, you will get some interests (called coupons) for compensation.
Fixed interest investment normally offers higher interest rate than cash investment.
Please note that cash and fixed interests are your defensive assets which give you good income streams, but limited growth opportunities.
Australian equity
You can invest directly into Australian equity by purchasing shares. Or you can also invest in a managed fund which invests in many companies’ shares.
The advantage of the first strategy is that you have total freedom of picking shares and if you want to time the market, it is very easy to do so. You will also receive franking credits with the dividends. Franking credits are like tax credits and they will offset your tax payable. When you receive dividends, you need to pay tax on them. However, companies have already paid tax on their profit and dividends are distribution of their profit. To avoid double taxation, you can claim back the tax that the company has already paid.
On the other hand, the advantage of indirect holdings include diversification and less maintenance as fund managers do the research and make the investments for you.
International equity
Similar as Australian equity, you can also invest directly in international equity or indirectly in an international equity managed fund.
Features Direct international equity International equity managed fundDealing with foreign share exchange Yes, you need to purchase stocks from stock exchanges from different countries No, you just purchase units from the fund
Currency risk Yes, you need to purchase the stocks in foreign currency. Yes, if the fund is unhedged. No, if the fund is hedged. Either way, you purchase the units in Australian dollars.
Research You have to do research yourself on each stock Fund managers do research on investments
Control on investment decision Yes, you decide which stock to invest in No, you decide which fund to invest in and the fund manager decide which stocks to invest within the fund
Diversification Low, you require to buy many stocks yourself High, managed fund invests in many stocks
Why invest in international equity? Firstly, Australian market is only 2% of the overall global market. Many big companies are overseas. Secondly, other countries may have a different economic cycle and have different factors affecting the financial market, thus diversification is achieved.
Property
For investment in property, you can be the owner of a physical house (direct property), or you can be the unit holder of a property trust. Property trust then includes listed property trust (LPT) and unlisted property trust. Below we have provided a feature comparison between the three.
Features Direct property Listed property trust Unlisted property trustPrice Fluctuation Low High, correlates with the share market Low
Liquidity Low High Medium / Low
Maintenance Level High Low – fund managers look after the building and find tenants Low– fund managers look after the building and find tenants
Initial capital outlay High Low Low
Tax advantage Income taxable, but expenses also deductible Up to 100% Tax deferred income Up to 100% Tax deferred income
Control over the property High N/A N/A
Diversification Low High High
Please note that Australian equity, international equity and property are your growth assets which give you great capital growth potentials, but also place more risk on your portfolio.