The types of investments you should consider will depend on your investment profile which takes into account your personal circumstances and financial situation. It will also depend on your goals. (Refer to our Goals and Risk Tolerance article)
An Authorised Financial Adviser can also help you do this.
Fixed Interest Investments
Where you lend someone money, and they pay you a set amount of interest and agree to repay you at a certain time.
There are many different types of fixed interest investments, including bonds, term deposits and debentures. The organisation issuing the investment is called the issuer. Governments, banks, finance companies, credit unions, building societies and companies all offer fixed interest investments.
The risks associated with each of these types of issuers varies. Government bonds are generally considered to be the lowest risk investment.
Generally, the higher the risk of an investment, the higher the return should be. But be aware that sometimes the return being offered may not adequately reflect the risks of the investment.
Some issuers of fixed interest investments may be independently rated by credit rating agencies. Investors should not make a decision to invest in fixed interest securities based on the advertised rate alone. An assessment of the credit-worthiness of the issuer is another important consideration.
Some fixed interest investments can be bought and sold on exchanges, including New Zealand’s exchange.
When you buy shares you buy part of a company. As a shareholder in the company you may be paid a dividend on your shares. Like any business, the companies you invest in may perform strongly or poorly depending on a number of factors. These include the economy in general and trends being experienced by the industry in which the company operates. As a result, the dividend paid on your shares can go up or down depending on how profitable the company is. It may not be paid at all.
Similarly, share prices rise and fall over time. If you sell shares for more than you paid, you make a capital gain on your investment. But you will lose money if you sell when the price is lower than the price you paid.
Listed companies – Many companies list their shares on a stock exchange like New Zealand’s exchange. To buy or sell shares in a company listed on an exchange, you can use a stockbroker registered with that exchange.
Trading through a stock exchange offers some protections for investors, because both the company and the stockbroker must comply with the rules of the exchange.
The price of listed shares is available in newspapers and on the internet, including on the website of New Zealand’s exchange. This allows you to watch and see how share prices change over time.
Stockbrokers typically charge brokerage when you trade. This may be a proportion of the amount you spend or it may be a flat fee for each trade. Some offer research and advice as well as trading services.
Stockbrokers are listed in the Yellow Pages and on the NZX website.
Unlisted companies – You can buy shares in companies that are not listed on an exchange. But be aware it is likely to be harder to sell these shares, as there may not be an established market for their sale. Also, unlisted companies and their trading activities are not subject to all the rules that protect investors in listed companies (like insider trading and continuous disclosure laws).
Money from individual investors is pooled and invested by a fund manager.
When you put your money into a managed fund, the investment decisions are made for you by the fund manager. Having a large pool of money to invest means the manager can usually get better deals than any one person.
The fund manager puts investors’ money into a range of investments depending on the nature of the fund. Each fund has its own rules about what the manager can invest in, and these rules are set out in the trust deed or a deed of participation, and/or the investment statement for the fund. Some funds invest in shares, debt securities and property, both in New Zealand and overseas. Others specialise in particular types of investments or countries.
You can pick a managed fund with lower, medium, or higher risk depending on the level of risk that suits you. Read more about risk and your risk profile.
You pay fees when you invest in a managed fund. Different funds charge different fees and they can be quite complicated. For example, there may be an initial fee when you first invest in a fund, an annual management fee, and an exit fee when you cash in your investment. Some managed funds also charge separate administration fees.
Important information about the fund, including fees, risks and what it can invest in, should be summarised in the investment statement for the fund. More detailed information is in the fund’s prospectus.
Types of managed funds – Unit trusts, group investment funds (GIFs) and superannuation schemes are the main types of managed funds.
When you invest in a unit trust or a GIF, you buy ‘units’ which represent a share of all the assets owned by the fund. As well as the fund manager, the fund will have a trustee to look after the assets for investors. For GIFs, the trustee may also manage the fund, or it may be externally managed. The value of your units in a unit trust or GIF will go up or down as the value of the fund’s investments changes.
Some managed funds are listed on New Zealand’s exchange NZX or overseas stock exchanges. You can buy and sell units in these funds. If you have units in a managed fund that is not listed on a stock exchange you can usually sell them back to the manager. However, you should check whether there are any restrictions on this.
Property is another common investment. There are also investments such as property schemes, contributory mortgage schemes, agricultural and forestry schemes, and futures contracts. Some of these investments are complicated, and if you are interested in them it would be wise to contact a financial adviser.
How Can I Get My Money Back?
One of the facts you need to know before you decide on an investment is how you can get your money back. This depends on the type of investment.
Fixed interest securities
Some fixed interest investments are ‘on call’. This means you can get your money out at any time.
Other fixed interest investments are for a set term. In this case, the institution you invested with doesn’t necessarily have to repay you if you want your money back early. If they do allow you to take your money out early, there is likely to be a penalty and/or a fee.
Fixed interest investments, such as bonds, that are listed on New Zealand’s exchange NZX or an overseas stock exchange can typically be sold more easily than investments that aren’t listed.
Shares that are listed on a stock exchange can be sold at any time provided there are buyers for the particular company’s shares. Whether you make a profit or a loss depends on the price of the shares when you want to sell, and whether this is more than you paid for them.
Shares that are not listed on a stock exchange may be harder to sell because there may not be a buyer when you want to sell.
If a managed fund is listed on the stock exchange, you can sell your units in the same way as you can sell shares.
With most other managed funds, you can get your money out by selling your units back to the manager of the fund, but there may be some restrictions on this. The amount you get will depend on the value of the units at the time. There may be a fee to pay.
Investments in KiwiSaver and other superannuation funds are often locked in until you retire. If this is the case, you usually can’t get your money out early.