This Article Contains:
- What is an investment vehicle?
- Types of investment vehicles
Let’s get started.
What Is An Investment Vehicle?
When someone talks about an investment vehicle, they’re referring to a means of investing money. There are tons of different investment vehicles available - each with its own various risks and rewards.
Why do they differ so much?
Each vehicle is subject to different regulations and contains different assets.
Some investment vehicles include stocks and bonds, while others may focus on real assets like gold and real estate. As a result, different investment vehicles will include different fees and tax charges on capital gains.
Generally, investment vehicles fall into two broad categories:
- Direct investments - Are not actively managed by an investment manager and include specific assets such as stocks, bonds, and real estate. With a direct investment, the investor usually owns the asset (either partially or wholly) themselves.
- Indirect investments - Are actively managed and contain investments selected by the manager or entity in exchange for a fee.
Indirect investments can be split into public and private investments.
Indirect public investments include ETFs, REITs, mutual funds, and more.
On the other hand, private investments include hedge funds, private equity, and venture capital. Typically, you need to be an accredited or institutional investor to participate in private investments like these.
6 Types Of Investment Vehicles
Here are six popular types of investment vehicles:
1. Alternative investments
Alternative investments are an asset class that doesn’t fall into traditional investment categories like stocks or bonds. As a result, they make excellent portfolio diversification options.
Some alternative investments that are open to everyday investors include:
Wine is an excellent example of a well-performing alternative investment historically reserved for the wealthy. With Vinovest, however, you can invest in fine wines for a minimum of $1,000.
Vinovest targets returns of 9% - 12.5%.
Rare collectibles like vintage cars and sports memorabilia tend to increase in value over time. However, like gold, rare collectibles tend to be expensive - so most people can’t invest in them.
Fortunately, with Collectable, you can invest in shares of high-value sports memorabilia for as little as $5.
C. Peer-to-peer lending
P2P lending is a process where individual investors lend money to individuals or businesses.
Fund That Flip operates much like a P2P lending platform, where real estate assets back your loans. Fund That Flip has a minimum investment of $5,000 and targets returns of between 9% and 14%.
Gold provides predictable returns during times of stock market volatility. However, as gold is so expensive, investing in it isn’t an option for everyone.
Thanks to Vaulted, it now is.
With as little as $1, you can invest in and sell your gold whenever you want.
2. Individual stocks
There are two different types of stocks: common stock and preferred stock. The main difference between the two is that owners of preferred stock have no voting rights, whereas holders of common stock do.
When you own stocks, you tend to earn through dividends, which the company pays to shareholders. Alternatively, you can also sell your shares and capitalize on their value appreciation over time.
Investors are generally charged commissions to trade, called stock trading fees. You incur these fees when you buy or sell stocks. It’s usually charged at a tiny percentage of the share price.
The historical average annual stock market return is about 10%. However, returns can vary wildly from year to year. The S&P 500, for example, often considered the benchmark for annual stock returns, returned 18.4% in 2020.
An easy way to invest
Public is an excellent option for those looking to invest in stocks. With no annual fee and a minimum investment of just $1, it’s the perfect place to start investing.
Bonds are a form of debt.
Essentially, you loan your money to a company, city, or government in exchange for being paid back in full along with regular interest payments.
Bond prices can vary greatly.
For example, it’s usually $25 for US savings bonds, whereas municipal bonds are generally sold in increments of $5,000.
As an alternative to buying individual bonds, you also have the option of investing in a bond fund. A bond fund is just a mutual fund that invests only in bonds.
Bond funds typically have an expense ratio of between 0.5% and 1.69% a year. In simple terms, the expense ratio refers to the total percentage of the fund’s assets used to cover the fund’s operating expenses. The lower this number is, the fewer fees you pay as an investor.
One of the best performing bond funds of 2020 was the Man GLG High Yield Opportunities, which returned 27.55% between 23 March and 16 September 2020.
A broker’s commission, added to the bonds’ price, is usually incurred when purchasing bonds. This fee can range from around 1% to 5% of the bond’s original value.
Generally, the higher the risk profile of the issuer, the greater is the rate of interest. Additionally, bonds with longer terms will offer higher rates of interest.
BAA is a credit rating used by Moody’s for long-term bonds. Bonds with a BAA rating are considered medium-grade investments that are relatively low-risk. Ratings vary from a high of AAA to a low of C.
An easy way to invest
For those interested in bonds, there’s Worthy - an investment platform that helps you invest in SEC-qualified bonds. With a minimum investment of $10, Worthy pays investors a fixed 5% return, compounded daily.
4. Exchange-traded funds (ETFs)
An exchange traded fund is a type of fund that you can buy and sell on exchanges - but have tax benefits as there are less frequent sales of the underlying assets.
Most ETFs track a specific index such as the S&P 500, meaning that the ETF’s price changes in line with the underlying index’s movement.
Additionally, the fund manager can create an ETF comprising a selection of stocks or other assets such as commodities (gold, oil, etc.) or bonds and sell shares of the fund to investors. Some ETFs even have other mutual funds as the underlying asset!
On average, an ETF has an expense ratio of 0.44%. This means that as an investor, you’ll likely pay $4.40 in fees for every $1,000 you invest.
An easy way to invest
Stash is an excellent platform for those new to investing. There are no account minimums, and the minimum investment is just $1, making it easy for anyone to invest in stocks and ETFs. You earn through stock price appreciation and quarterly dividend payouts.
5. Index funds
An index fund is a portfolio of assets constructed to match the performance of a market index, such as the S&P 500. Index funds are popular investment vehicles because they provide broad exposure, low fees, and predictable returns.
Because index funds are passive investments, their fees are considerably lower than actively managed funds. An index fund's typical expense ratio is about 0.2% - but it can even be as low as 0.02%.
Index funds are subject to market conditions, and each fund will perform differently. The S&P 500 index, one of the world’s most-followed indices, has an average 10-year return of 11.35%.
6. Pooled investments
A pooled investment vehicle is a large investment fund that works by merging lots of small investments from a large number of investors.
They are great for collectively taking advantage of assets that would typically be out of reach for most individual investors.
Some examples of pooled investments include:
A. Hedge funds
A hedge fund is an actively managed pooled fund that utilizes advanced investment strategies to generate investor returns. It’s important to note that hedge funds are subject to far less regulation than other funds.
As such, they’re generally only available to accredited investors who ideally have a high risk tolerance.
However, Titan is a robo-advisor that operates like a hedge fund, but is available to non-accredited investors.
Titan targets annual returns of 15% with a minimum investment of $100.
The fee is just $5 a month or 1% of your portfolio if it’s above $10,000.
B. Real estate investment trusts (REITs)
A REIT owns and generally manages income-producing real estate.
A real estate investment trust functions like mutual funds in that it’s a collective investment vehicle. This creates a far more affordable option for everyday investors to take advantage of the benefits of property investments.
Diversyfund is a zero-fee real estate investment platform that targets 11-18% returns with a minimum investment of $500.
C. Mutual funds
A mutual fund invests pooled capital into securities such as stocks, bonds, money market instruments, or other assets. As an investor, you’re purchasing shares in the mutual fund, with each one representing partial ownership of the fund.
Generally, an actively managed mutual fund has an expense ratio between 0.5% and 1%.
Across seven broad categories, mutual funds returned an average of 10% in 2020.
Betterment is a robo-advisor that’s perfect for those who want to start investing in ETFs and mutual funds. There’s no minimum investment and the annual management fee is just 0.25% You earn through dividend payouts and stock price appreciation.
Now that we’ve covered what investment vehicles are, you should be in a better position to choose one that’s right for you.
While it’s a good idea to get some investment advice from a qualified investment advisor before investing, always do your own research too.
Luckily, Moneymade is your one-stop-solution to compare various investment platforms - highlighting information on potential risks, returns, minimum investments, and more!