Term Investments vs Other Investments
An investment is an action of depositing money or acquiring capital with the goal of collecting income of financial gains. A term investment is simply an investment but set over a fixed. A term investment is when you deposit a lump sum of money to a bank or credit union for a fixed term so that it can sit there and earn a fixed interest rate, dependent on tenure.
There are several other forms of investments besides a term deposit, such as; bonds, property, shares, savings accounts and managed funds. Each has their benefits and reasons for them. So it pays to know the difference between each form of investment before you decide on which one will benefit you the most.
Work similar to term investments as we lend money to the likes of a company, organisation or government with the promise that we will be paid back at the maturity date. It operates differently as the bond will have a set interest rate that will get paid out periodically over the term of the investment. It is once the bond comes to the end of the term that the full face value of the sum deposited is returned. Bonds can be sold early before the end of the agreed investment, but they also can have their price fluctuate due to economic changes. So there is slightly more risk involved than term deposits.
Investing in property is a long-term investment that can come in the form of rental income from tenants or a gain of value in the property over time when we re-sell. A property investment works differently from a term investment as there is no actual set term for this investment. We may purchase this asset and let it collect rental income indefinitely, or we can hold on to the asset and sell off when we are satisfied with the return value.
Shares works differently from term investments as we aren’t depositing money for a fixed term. Instead, we are buying a small portion of a company so that we take a share of any future profits. These are paid out in the form of dividends and fluctuate depending on how profitable the company is over the period. You may sell shares at any given time for a gain or loss as there is no fixed term.
For short-term investments, one of the most common forms is a savings account with your credit union or bank. A savings account is an account where you make a term deposit that the institution borrows, in return for small amounts of interest on top of your initial investment. There is no real fixed term on the investment, so you can request your money back at any given time as well as make additional contributions when you want to. But this comes at the cost of a smaller interest rate when compared to a term investment.
A Managed Fund is an investment scheme where experts deposit our money for us into a set portfolio of investments. It diversifies our finances for us so we can sit happily by and watch our money grow over time for us. An example of a managed fund would be the Fisher Funds Kiwi Saver scheme, we deposit our money to our Kiwi Saver’s, and experts take the money and invest it appropriately for us. The Fisher Funds Kiwi Saver works as a long-term investment as you can only touch the money you have invested in there after a five year period. So in a way it is similar to a term deposit, the only main differences are the diversification of investments and potentially lower interest rates.
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