How to start investing: different ways your money can work for you

Fixed income investments are typically lower risk products which generate steady, predictable returns – hence the name ‘fixed income’. The most common example of this asset type are bonds.

Bonds are usually issued by companies or governments to raise money. When investors buy a bond, they are effectively loaning money to the bond issuer. The issuer agrees to make regular interest payments over the life of the bond, and to refund the full principal once the bond expires (known as ‘reaching maturity’).

Bonds are usually considered low risk, defensive assets.

Pros of investing in fixed income

• Fixed income assets are usually less risky than things like shares because they are backed by governments and large corporations. 
• Bonds have low correlation to other asset types – meaning the market factors that might hurt shares won’t always affect bonds. This makes them useful for diversifying your portfolio.
• Fixed income assets can provide investors with a predictable income stream.

Cons of investing in fixed income 

• Fixed income returns are usually lower than those of higher risk assets.
• As the interest rate offered on a bond is usually fixed, subsequent increases in the cash rate can reduce the market value of existing bonds. This is because bonds issued after the cash rate increases will pay a higher interest rate.
• There’s always a risk that a bond issuer could default on their payments. Typically, the higher the interest offered on a bond is, the higher the risk that issuer may default on their repayments. 

How to invest in bonds

You probably already have exposure to bonds through your super. Bonds can be purchased directly from the issuer through a public offer, or you can go through a broker or trading platform. 

Additionally, you can invest in bond funds and some bonds can even be traded on the share market.

Exchange Traded Funds, or ETFs, are investment funds which are listed on a stock exchange like the ASX. This allows investors to buy and sell shares in the fund instead of having to invest through the fund directly.

As ETFs are listed, investors can access them more easily: the minimum to invest is usually significantly lower, they don’t normally charge as much in fees, and they’re more liquid than unlisted units in a fund.

ETFs create returns through both dividends from the fund’s underlying assets, and capital gains. Management fees are usually taken from the fund assets on a periodic basis. 

Pros of investing in ETFs 

• ETFs give investors access to a diversified portfolio of assets without having to construct the portfolio themselves.
• ETFs are relatively affordable and can be more easily entered and exited than trying to buy into a fund directly.
• Different ETFs can be used to serve different purposes. Some track a specific index, others focus on investment themes like green energy or AI to try and beat index performance.

Cons of investing in ETFs 

• ETF fees are usually lower than traditional managed funds but still affect your returns, especially compared with owning the underlying shares directly.
• As ETFs are traded on an exchange, the price of individual units in the fund can deviate from the underlying value of the assets it represents depending on demand. 
• ETFs and their underlying assets are still subject to the same market conditions as other asset types, and you can still lose money investing in them. 

How to invest in ETFs

Investing in ETFs is exactly like investing in shares – you will need to go through a broker or investing platform. As with any investment, you should research different ETFs to see which is the most appropriate before you invest as each ETF is constructed differently.

Investing in cash works much like having a bank account. It involves holding different types of currencies across the world earning a return from regular interest payments. Holding cash is a highly liquid investment strategy that’s considered very low risk, but the returns are usually small relative to other asset types. 

Pros of investing in cash

• Cash is considered a defensive asset – this means when markets fall, your cash won’t lose as much value as other assets like shares might. 
• Cash is highly liquid. Investors can use this cash to purchase other investments and quickly take advantage of new opportunities if they arise.
• As cash generates returns through interest payments, it can benefit when interest rates are climbing.

Cons of investing in cash

• Cash is a low-risk asset class, it typically doesn’t generate high returns.
• Inflation will gradually erode the value of your cash holdings over time.
• Just as higher interest rates improve your returns, a falling interest rate will mean lower returns. 

How to invest in cash

There are several ways to invest in cash, including through your super. Alternatively, you can put your money into a term deposit. These pay higher interest than a savings account but you can’t access the money you invested for an agreed period – varying from 1 month to about 5 years. 

Infrastructure refers to any large-scale physical assets, like roads, train lines, power stations, communications towers, public housing, and more. These assets generate returns for investors through income earned by the underlying asset – for example, tolls charged by a toll road.

Often these assets are considered essential services, so the fees being charged are regulated by a government agency. While this might limit how much can be charged, it also means investors can expect predictable cash flows over a long period – infrastructure assets typically have at least a 30-year lifetime. 

Pros of investing in infrastructure

• As these large physical assets can’t be easily duplicated by competitors, they’re often run as a monopoly. In cases where a competitor might be able to build a rival asset, the barriers to entry are still very high. 
• The income earned by these assets is often linked to inflation – meaning that as the prices of other goods and services increase, the asset’s income does too. As inflation normally reduces the value of investors’ assets, this can be an attractive feature for long term investors. 
• After these assets are built, their associated operating and maintenance costs are usually quite low, and future cash flow predictions tend to be both highly visible and relatively secure.

Cons of investing in infrastructure

• Infrastructure assets are highly sensitive to changes in the interest rate because of their long investment horizon. This means increases in interest rates could erode some value.
• These assets aren’t usually as liquid as shares or fixed income, making it harder to sell your stake in an infrastructure asset. Infrastructure liquidity will also depend on how you invest into a project (more on this below). 
• There are many infrastructure-specific risks to consider, including risks which may only affect that asset. For example, what will happen to your investment if a bushfire causes significant damage to it?

How to invest in infrastructure

You can invest in infrastructure through your super, depending how your fund allocates members’ money.

You can also invest outside of super by pooling your money with other investors through a fund or a trust. Funds and trusts can be either listed – meaning you can trade your stake on a stock market – or unlisted.