If you have cash in reserve, it might be time to consider an investment account – they offer a way to grow your money by earning returns.
Investment accounts refer to a wide range of accounts that allow you to grow your money by investing for a return.
With a wide selection of investment accounts available, it’s important to look beyond the returns you might earn and select the type of investment account that suits your goals and comfort level with risk. On the plus side, you can mix and match several different investment accounts to bring diversity to your investment portfolio.
What are the different types of investment accounts?
Investment accounts are as different as the different types of investments available.
On the low-risk end of the spectrum, a savings account, term deposit, and even a presumption account can be considered an investment account.
If you want to invest in stock markets, a stock trading account held with an online broker is a type of investment account that can be used to invest in stocks, exchange-traded funds (EFTs) and listed real estate trusts (known as A-REIT).
If you have a Super Self-Directed Fund (SMSF), you will likely need a variety of investment accounts – ranging from a savings account to a stock trading account.
Which account is best for investing?
There is no single investment account that is the “best” choice for every investor. We each have different goals for our money. Choosing an investment account therefore comes down to deciding where you want to invest – a decision you can choose to make with the help of a financial planner.
That said, there are some features to look for in investment accounts:
Fees will reduce your investment returns, so it’s always a good idea to look for an investment account with no or minimal fees. Savings accounts in particular should not have fees, especially since the interest yield your money earns is likely to be low. On a transaction account, for example an SMSF, attention should be paid to the monthly bookkeeping fee – not all accounts charge this, so it is a cost that can often be easily avoided.
Charges may also apply to managed funds and unlisted ETFs. You will pay these fees regardless of the return on your investment. This highlights the value of taking a close look at the fees you will pay and comparing costs between different funds and fund managers.
One of the golden rules of investing is that with higher returns comes higher risk. So while a particular type of investment account may have the potential to generate strong returns, you’re also likely to lose money if the value of your investment drops.
Spreading your money across a variety of investment accounts can be a way to smooth returns and reduce risk. You can, for example, decide to hold funds in a term deposit, while also investing in stocks and ETFs. This diversification means that your money will not bear the full brunt of a fall in any particular investment market. You should also keep in mind that past performance is not a reliable indicator of future performance.
The speed with which you can access funds held in an investment account is called “liquidity”. This is something you may want to keep in mind as unexpected bills or expenses may arise and you may need to access cash quickly.
Savings accounts tend to be very liquid because your money is usually on demand. But with a term deposit, you will likely have to pay a penalty if you need to withdraw some or all of the funds before the set term expires.
With a stock trading account, you may be able to cash out some of your stocks in as little as 24 hours. However, stocks are generally considered a long-term investment, and selling when the market is falling because you need extra cash can mean a capital loss on your investment. Having “rainy day” money in a demand investment account, such as a high-interest savings account, can help you weather any curve without having to dip into other investments prematurely. . You may also consider the idea of creating an emergency fund to give you an extra buffer.
Is an investment account a good idea?
The beauty of an investment account is that it will often earn a return on your money. This is passive income, meaning money you don’t have to work for, and the extra income you earn can be reinvested, used for personal goals or for repay a debt.
By taking advantage of an investment account, you can join the 9 million Australians who hold investments outside of their homes and pensions, according to research in a ASX Investor Study.
Even better, by reinvesting the returns from your investment account — whether it’s stock dividends, interest from savings accounts, or distributions from managed funds or ETFs — you can increase the benefits of returns. compounds to create long-term wealth.
The key is to select investment accounts that are right for you, your goals and your perception of risk. If you are unsure of these factors, it may be helpful to speak with a professional advisor.
Main image source: MEE KO DONG/Shutterstock.com.
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