The mycash.ie quick guide to investments

The difference between saving and investing has to do with time. Investing is saving for the long term. If you can commit your funds for the long term, you can expect to get greater gains over time than, say, a deposit account with a bank or building society where you can withdraw your money on demand.

The gains you can expect to make depend on the risk you are willing to take. The higher the risk, the greater the potential return – but the greater the chances of your investment actually losing money. So your choice of investment depends on your attitude to risk.

Understanding Risk

Risk is the probability of losing money on your investment. It is closely connected to volatility: that is, the extent to which your investment moves up or down over a period. Risky, volatile investments can show short term losses but can make large gains over time.

So, your attitude to risk will often depend on your circumstances. If you can afford to invest and leave your funds in place for the long term, you can probably take on more risk than a person who might need to liquidate the investment in the short term.

The level of risk attached to your investment depends on the particular assets where the funds are invested. There are four main asset classes where you can invest.

Cash: This is normally the most liquid asset in that you can usually withdraw promptly. The downside is that general interest rates may not be attractive and may hardly beat inflation, so in effect you are losing money.

Bonds: A bond is like an IOU and may be issued by a company or government. Returns are usually secure and predictable but may not be hugely attractive.

Shares: Investing in company shares (or equities) has shown excellent growth over the long term.

Property: This is a long term investment and not particularly liquid.

Putting money on deposit or buying a property is reasonably well understood by most people. Investing in bonds and shares, however, requires a level of knowledge and expertise you may not possess. Investing in property usually requires a substantial capital commitment; furthermore, property is not very liquid: it takes some time to dispose of property.

But there is a solution. Investment funds are pooled products that combine the money from hundreds and thousands of investors into a single investment vehicle that is professionally managed. It also spreads your risk: for example, with an equity fund you buy a diversified portfolio of different companies rather than having your funds riding on the fortunes of a single company.

How to select a fund
There are a multitude of funds to reflect your appetite for risk or preference for particular asset classes.

Past performance is another guide but of course there is no guarantee that a good performance will continue. Similarly, a fund’s performance will also be highly dependent on the professionals who manage it and therefore some investors tend to follow individual or teams of fund managers rather than a particular fund or investment product provider.

Types of funds

Equity or stock funds invest in company shares. Although they are relatively high-risk these funds tend to show the best returns over the long-term. Equity funds are sometimes classified high-cap, mid-cap or low-cap. A high-cap equity fund invests mainly in companies with a high market capitalisation (stock market value) while a low-cap fund invests in low-cap stocks and so on.

Equity funds are often classified as ‘value’ or ‘growth’. Value stocks are those that a fund manager considers relatively undervalued by the market. Growth stocks tend to be shares in more high-risk, early stage companies.

Strategic and sector funds invest in a particular sector of the stock market for example, technology, media or financial. These give above average funds when the sector outperforms the market average.

Index funds track the performance of stock indexes such as the ISEQ or FTSE 100.

Fixed income or bond funds invest in government or corporate debt instruments (bonds) that pay the holder a fixed rate of interest or coupon.

Money market or cash funds invest in cash or near-cash instruments.
Funds may invest internationally. They also may have a degree of social responsibility attached and these are sometimes known as ethical funds.

 

Fees
When choosing to invest in a fund pay attention to the effect of fund charges. These charges, whether initial commission or annual management fees, have the potential to affect your fund’s performance over time. This effect can be quantified in the reduction in yield figure which must be given to you by all fund managers.

You will also have to pay 23% tax on all investment gains and this will be deducted from your fund’s value annually.