Discovering investment options (Part 2)

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For many people, a big cash injection such as an inheritance could mean the difference between a comfortable retirement and a stretched one. It can be easy to spend cash on things you have always wanted such as a pool for the backyard or a home renovation, but there could be better ways to utilise the extra funds. Some may decide to tuck the money away into a term deposit, but there are other options available. The below are possible options that are worth considering.

Shares

Purchasing shares will generally make you a part owner of a company. Before taking the leap, consider your investment strategy by speaking to a professional financial advisor1.

What are the benefits

  • Potential capital gains from ownership of shares that could grow in value
  • Additional income from dividends
  • Potentially lower tax rates through conservative long-term capital gains

What are the risks?

  • Drops in share price value
  • Depending on the type of shareholder, you may be the last to be paid if the company becomes insolvent
  • Share prices go through cycles of peaks and troughs so dividends can vary

Bonds

A Bond is a financial instrument that is provided to an investor in exchange for capital (cash) by a government or corporation if they need to raise money. Investors who purchase bonds are lending money to the bond issuer for a fixed period. During this period, interest payments are made to the investor. At a stated future date, the principal amount borrowed will be returned to the investor2If you’re looking for a safer investment, some investors tend to steer towards government bonds as they are generally less volatile. Below are some of the benefits and risks that may be involved3.

What are the benefits?

  • Generally less volatile than the share market
  • Inversely related to interest rates, as interest rates decrease the value of bonds increase
  • Investors can still sell bonds without waiting until maturity

What are the risks?

  • Can be complex financial investments when taking into account, time to maturity, economic conditions and the financial stability of the issuer
  • There are different types of bonds and each have varying characteristics and risks
  • Generally, lower risk bonds have smaller returns. As such, bonds may be more suited to longer-term investors with bigger capital investments.

If you would like to know more about wise financial investments, the IMB Bank Financial Planning team consists of experienced and highly qualified financial planning professionals.

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Australian Securities and Investments Commission (ASIC), 'MoneySmart: Shares', Accessed: 6 October 2017

2 ASX.com.au, 'Products: Bonds', Accessed: 6 October 2017

3Australian Securities and Investments Commission (ASIC), 'MoneySmart: Australian Government Bonds', Accessed: 6 October 2017


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