Asset classes consist of a group of securities with varying degrees of risk. There are three main asset classes.
- Bonds (also referred to as fixed income)
Each asset class has different investment characteristics, for example, the level of risk and potential for delivering returns and performance in different market conditions:
Equities (also known as ‘ordinary shares’, or ‘shares’) are issued by a public limited company, and are traded on the stockmarket. When you invest in an equity, you buy a share in a company, and become a shareholder. Equities have the potential to make you money in two ways: you can receive capital growth through increases in the share price, or you can receive income in the form of dividends. Neither of these is guaranteed and there is always the risk that the share price will fall below the level at which you invested.
Perhaps the easiest way to think of bonds is as a loan. They’re issued by companies and governments as a way of raising money. Bonds provide a regular stream of income (which is normally a ﬁxed amount paid at regular intervals) over a speciﬁc period of time, and promise to return investors their capital on a set date in the future. Bonds can offer stable returns, and are perceived to be lower risk than equities – although typically deliver lower returns over the long-term. Investing in fixed interest securities issued by companies other than those issued or guaranteed by certain governments, exposes you to greater risk of default in the repayment of the capital provided to the company or interest payments due to the fund. The value of bond investments are sensitive to changes in interest rates.
A cash fund typically invests in a portfolio of cash, short-term deposits, and aims to achieve better rates of interest than bank deposit accounts. A cash investment tends to be seen as a lower risk, lower return option than bonds or equities. It can be a useful tool for very risk‑averse investors or as a temporary home for money in between longer‑term decisions. They aim to achieve a competitive rate of interest whilst maintaining safety and liquidity for investors. Because they generally offer lower rates of return, they are less suitable for investors seeking long-term capital growth.
There are different styles of investing:
Multi-asset funds invest across a number of different asset types which may include equities, bonds and cash. This gives you a greater degree of diversification than investing in a single asset class. Diversifying across a broad range of investment strategies, styles, sectors and regions can help cushion the occasional shocks that come with investing in a single asset class. It also enhances the potential for investing in a better performing asset class, while spreading the risk of investing in lower performing asset classes. However, investors should remember that diversification does not fully protect you from market risk.
In recent years, many investors have turned to absolute return funds. This is a way of investing that aims to generate positive returns in all market conditions. It uses investment techniques that can profit from both the ups and downs in markets and share prices. For many, absolute return investing has come to be seen as an integral part of their portfolio. Please note that there are no guarantees an absolute return fund will achieve its objective.
All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Your capital and income is at risk.