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Smart investment options! – The Budget Diary

Hey guys,

I’m looking to invest short term however before beginning to write this post I wasn’t too sure what the best way to go about investing was the best for my risk and return expectations?

After doing a little research there were a few different types of investment that I could potentially see myself looking into.

I’ll talk about these and a few other options out there that I think are not the best in terms of investing.

Five in total
Term deposits.
Bonds
Shares
Pie funds
Peer to peer lending.

Term deposits

Term deposits are when you give the bank a lump sum of money to hold on to and for a locked in time frame. The time frame is usually between 3 months and 5 years. Term deposits give a better return than simply keeping your money in a standard everyday bank account. Banks are able to give a bigger return because they invest your money and make a profit for themselves. If you would like access to your money the bank requires you to pay penalty fees because your money is still invested and they cannot simply give your money back. In my opinion term deposits are very low risk and are a guaranteed return on your money. The best term deposit rates can be found at http://www.canstar.co.nz/
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Bonds

Bonds are essentially an IOU with an interest rate attached on the term of the loan. The entity you are lending to is known as the issuer. Bonds are issued to raise money for a government, company, corporation or other entity. The issuer promises to pay the interest rate set out and also promises to repay the face value of the bond when it reaches maturity. The interest on bonds are generally paid semi annually. http://tradingeconomics.com shows the bond returns from NZ govt bonds from 1986 when they returned 19.2% to May 2016 where they are returning 2.6%.

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Bonds could be seen as medium risk due to the potential that if interest rates rise then the face value of your bond will fall therefore payout at maturity will be less than you paid. There are also a few more risks that you can look at on the website
http://www.investopedia.com/ask/answers/05/bondrisks.asp

Shares

When a company needs to raise money it creates shares through an initial public offering (ipo) on the stock market. The company keeps the money to invest and the purchasers of the shares can sell or hold these shares. The shares will go up if the company is doing well or when the market prices rise (Stock analysts follow market trends to buy and sell at the right time). The shares will go down in worth if the company is selling less product, receives bad publicity in the news, or when the market prices go down. When shares are bought or sold this can push the share price up or down if there is enough volume. With some larger comanies dividends can also be a part of the package. A dividend is essentially returning a portion of the companies profit to its investors. In my opinion shares are very risky as the market is easily affected and this was evident in Febuary when the Chinese market crashed vastly affecting global shares. This blog talks about the Chinese market crash and how the market is still suffering doom and gloom. http://theeconomiccollapseblog.com/archives/tag/china
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Pie funds.

Pie funds are a group of investments that work together to provide protection from fluctuations in whatever market is being invested in (Diversification). PIE or portfolio investment entity is a portfolio of investments. You may already be using PIE funds in the form of a superannuation plan ie. Kiwisaver.
In my opinion PIE funds provide a steady return over a long period but not necessarily a short period. This article gives an insight to how bumpy the ride can be when investing in pie funds and how it can be very successful on the other hand. http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11472827
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Peer to peer lending.

Peer to peer lending is essentially that! Loaning money to your peers.
Peer to peer lending seemed very appealing when I read up on their returns however the minimum investment term with a peer to peer lending platform that I liked the sound of was three years, a little longer than I’m prepared to invest in at this stage. https://www.squirrelmoney.co.nz/investment/ sounded like a good investment with a return up to 8% and the extra bonus that if your peer defaults on their loan repayments whilst loan shield (A fund in which a portion of repayments are deposited) has funds, it will be used as an insurance like feature to somewhat protect your investment. There were no loans available to lend in the 2 year bracket so in terms of short term this is not feasible. Another peer to peer that has taken off recently is https://www.harmoney.co.nz/

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In conclusion I’ve decided that the best in terms of security for me right now is the short term deposit with some paying in between a 3-4% return. If I had more time to invest (not so short investment) I think that peer to peer lending could be a fairly low risk investment because you have the ability to like pie funds diversify your investment by splitting your lending up between multiple borrowers thus reducing your chance of having a borrower default.

Thanks for reading and be sure to check in for more great reads,

Braeden.

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