What Exactly Is an Investment Vehicle?
An investment vehicle is a product used by investors to gain positive returns. Investment vehicles can be low-risk, such as certificates of deposit (CDs) or bonds, or high-risk, such as stocks, options, and futures. Annuities, collectibles such as art or coins, mutual funds, and exchange-traded funds are other types of investment vehicles (ETFs).
Benefits and drawbacks of various investment vehicles.
These are the most popular types of investment vehicles that have potential benefits and drawbacks as well.
1. Savings account
A traditional savings account, although it isn’t often considered one, is one of the most widely used investment vehicles around the globe. Savings accounts offer a way to build your savings over time, even though they don’t have very high-interest rates.
A savings account investment is the same as an investment in currency. Saving money in the United States is equivalent to investing in and holding the U.S. Dollar (USD). Your investment will return more if the USD increases in value. You lose purchasing power if the USD falls in value.
Savings accounts are one of the most popular investment vehicles. However, they can also lead to declining returns. The U.S. currency’s strength and ultra-low interest rates in savings accounts are rarely more than the rate at which the USD loses value because of inflation.
2. Money Market Account
A money market account is a common investment vehicle similar to savings accounts. These accounts pay interest and are managed by banks. The money that you put into a money market account, unlike savings accounts, is used by the bank to make its own investments in the financial markets.
These funds can be used by the bank for investing purposes. However, you will not reap the benefits nor take on the risks.
In exchange for your permission to use your money for financial market transactions, the bank will pay you a higher interest rate on these accounts than what you see in traditional savings accounts. You can withdraw the balance from your account whenever you need it, just like with savings accounts.
But with the benefits, there are also some opportunity costs to using these accounts. Some banks will set a threshold of $1 for the minimum balance requirement, others may require you to bring $5,000, $10,000, or more to open an account. When it comes to withdrawal guidelines, money market accounts are similar to savings accounts. In the past, these accounts were subject to federal regulations that limited convenient withdrawals to six per month.
3. Mutual Funds
Mutual funds are pools of investment vehicles. A mutual fund is a pooled investment vehicle that pools money from many investors to purchase a wide range of securities. Mutual funds give investors instant diversification.
Mutual funds are typically managed by financial institutions’ fund managers. An investor can’t control what happens to the fund once they have purchased it. There is no way to invest in one stock or bond, but instead in a mix of assets. A commission or fee must also be paid.
High expenses and high sales charges, management abuses, and tax inefficiency are some of the disadvantages.
Commodities can also be real assets, mostly natural resources like oil, natural gas, and precious and industrial metallics. Because commodities are not affected by public equity markets, they can be used as a hedge against inflation. The value of commodities fluctuates with supply and demand. Higher demand for commodities means that prices will rise and investors profit.
Commodities are not new to the investing world and have been traded for thousands upon thousands of years. Osaka, Japan, Amsterdam, Netherlands, and Osaka in Japan could be credited with being the earliest formal commodities trading, which was established in the 16th century.
High volatility, Speculation, and Damage to the environment are some of the disadvantages.
6. Real Estate
There are many kinds of real assets. Real assets include land, timberland, and farmland. Intellectual property, such as artwork, is also a type of real asset. Real estate is the most popular type and the largest asset class.
Real estate, aside from its size, is also interesting because it shares characteristics with bonds. Property owners get current cash flow from tenants who pay rent and equity. The goal is to increase long-term asset value, which is known as capital appreciation.
Valuation is the biggest challenge when investing in real estate. There are three types of real estate valuation: income capitalization, discounted money flow, and sales comparable. Each method has its advantages and disadvantages. It is essential to have strong valuation skills and to understand how to use different methods to become a successful investor in real estate.
There are many other investment vehicles to consider, such as annuities, certificates of deposit (CDs), and money market accounts. It’s important to carefully evaluate the benefits and drawbacks of each investment vehicle in order to determine the best fit for your financial goals and risk tolerance.