A quick guide to investment asset classes

Chapter 4: What can you invest in?

This video is for educational purposes only. This should not be viewed as advice or a recommendation to invest.

Now you have a better understanding of some of the products, it might help to get a better understanding about what your money could be invested in.

Funds are a great way to start because they give you a chance to spread your money across multiple types of investments rather than putting all your eggs in one basket. By mixing things up, if one investment dips in value, another might rise and help balance things out.

The value of an investment may go down as well as up and you could get back less than invested. Tax benefits are based on personal circumstances and are subject to change.

To really see how funds work, it helps to understand the asset classes that make them up. Most investments fall into a few main categories called asset classes. An asset class is just the type of investment your money goes into. Try and make a return, essentially a home for your money. Some of the most common asset classes include cash, bond, equities, and property. Each has its own purpose and its own appeal. And when investing, you might want to consider a one or a mix of these different asset classes.

Let's take each in turn. The first example of an asset class we'll explore is called cash. It might seem obvious, but it's worth taking a moment just to understand. Think of it as investing your money in a bank account. In practise, when you see an asset class labelled as cash, it may include a range of bank accounts, yes from the UK and perhaps from abroad, or similar low-risk options. The benefits of cash is that it should be pretty stable. The drawback is that for this ability, the return may be lower. And if those returns don't keep up with inflation, the real value of your money could fall over time. That's why cash is often thought of as a short-term home for investments. It may be not so good for longer-term growth.

Bonds, or sometimes called fixed interest, are another type of asset class. Think of it like this. If a friend borrows ten pounds from you and promises to pay it back in a year, plus a little bit extra as thanks, that's basically what a bond does. Instead of a friend, you're lending your money to a company or maybe a government. You don't have to hold on to the bond until it's paid back though. You could sell it to another investor before the redemption date. This does come with some risks. For instance, what you sell it for might be less than what you originally paid. In return for your loan, bonds pay an interest over time, a known rate, and promise to return your money a set date called the redemption date. Now this predictability makes bonds appealing if you like stability. There are still however some risks. The company or the government you've lent the money to might miss interest payments, or in the worst case, default completely. That could mean losing some or even all of your investment. The value of your bonds can go down as well as up, so you could get back less than you invested if you choose to sell before that set redemption date. Now bonds are a great place for stability, but not the best if you're looking for long-term growth. Compared with cash, bonds carry a little more ups and downs, but that extra movement can come with the potential for a bit more reward.

Third up it's equities, or also sometimes known as company shares. This asset class may be what people think of when they think of investing. They give you, the shareholder, a stake in the ownership of a company, and if the company makes a profit, you may get a payout called a dividend. Shares are issued by companies around the world and traded on exchanges such as the London Stock Exchange. The total value of all the shares issued by a company is known as its market capitalisation. In other words, how much it is worth in total. The attraction of equity is that when the company does well, your investment does well too. It's a bit like owning a small slice of a restaurant. If the restaurant is busy and making good profits, you benefit and you might even get a share of those company profits. Over time, if the restaurant grows and becomes more valuable, so does your slice. That's why with a fair wind, equities have the potential to deliver stronger long-term returns than savings. You have the capability to keep up with inflation and sometimes even go beyond it. The downside of shares is their prices can be quite volatile. Their value can go up and down constantly. There's also the risk that if a company underperforms, or if the market works against you, the value of shares could go down and you may get back less than you invested. That can feel quite unsettling. That's why equities are usually seen as a longer-term investment. The idea being that over time, the ups will outweigh the downs. So equities could be a good for longer-term growth, but come with less certainty.

And fourth, property. Just as it sounds, this means investing in property but rather than one single house or flat, it's usually a share in a wider portfolio of properties. And most of us are familiar with the idea of property investment. And many people like the thought of bricks and mortar. Of course, the value can still fall as well as rise. As you know, selling a property, however, can take time. So it's an asset class that may not be as fluid, or liquid as we sometimes say in finance, as some of the other asset classes.

So hopefully, you get an idea of what we mean by asset classes. Each has its own role, its risk, and its reward, and each can contribute to a balanced portfolio. We could have even gone on to consider other asset classes such as commodities, infrastructure, or even fine art and collectibles.

And it's worth remembering that if you do invest in any of these asset classes through a fund, you don't actually own these assets directly yourself. The fund does, on your behalf.

The key takeaway is that there are many asset classes you can invest in, and you don't need to pick just one. Funds allow you to combine different asset classes in one investment, giving you diversification and the benefits of professional management. Understanding these building blocks make it easier to make smart decisions when we start looking at the practical steps of investing.

This video is for educational purposes only. This should not be viewed as advice or recommendation to invest. Investing offers the potential for better returns than cash savings over the long term (5+ years).

But there are risks, the value of your investments may go down as well as up, and you may get back less than invested.  If you want advice on investment choices, then we’d recommend speaking to a financial adviser. There may be a charge for advice.