Before we answer that question, it would be wise to first know the different types of investments available. In general, there are two types of investments: the fixed income investments and the non-fixed or variable income investments.
Fixed Income Investments
Investments under this category are those which yield fixed or guaranteed stream of income. On the onset, the investor already knows how much he would earn from that investment in a specified period of time.
- Time Deposit – is money deposited in a banking institution to earn a fixed interest and cannot be withdrawn for a certain period of time. When the term is over, the capital plus the interest earned can be withdrawn or can be placed again for another term. This type of investment has a potential to grow over time. It’s a low risk investment; earning potential is also low.
- Government Securities – these are Treasury bills and bonds that government sometimes makes available through banks. T-bills are short-term investments with terms usually ranging from 90 days to a year. T-bonds have longer terms than T-bills. Since the government are guaranteeing these securities, these investments are considered low-risks. Government securities earn higher than what time deposits do.
- Corporate Bonds – these are debt instruments offered by companies with terms ranging from 2 years to 7 years. Some have 20-year term. Banks usually offer these corporate bonds. Inquire from your trusted bank for availability. Minimum investment for these are usually at P100,000.00.
Non-fixed Income investments
Income in these types of investments vary depending on actual market performance. Potential for earning can be maximized by going long term for these types of investments.
- Mutual Fund – is an investment company which pools together the money from different investors and invests them in various funds such as equity or stocks, bonds, or a combination of both (managed fund). The mutual fund company sells shares to the public that represents their holdings in the fund.
- Equity or stocks – stocks are shares in a publicly-listed companies. Those who buy shares from these companies become shareholders, which makes them co-owner of the company. Shareholders earn through dividends the company declare, or through selling of the shares they hold. The Philippine Stock Exchange is the marketplace for these stocks. To buy company shares, one should consult with an investment banker or a stock broker. One could also buy and sell shares of stock online through COL Financial. Stock investing are fairly high-risk investments but the potential for income is also high.
- Real Estate – one can earn through value appreciation of land properties. A steady income can also be derived through rentals of properties.
- Business – businesses potentially can give the highest return for one’s capital. However, this is also the riskiest and entails a lot of hard work and supervision. A successful business can make one a multi-millionaire.
Back to our question…
If you ask a real estate broker, he would tell you that real property – a condo, townhouse or a piece of land – is the best investment. You go to a stock broker and he would tell you that buying stocks is the best. A mutual fund representative will recommend mutual fund. A financial advisor would most probably sell you a variable life insurance. You go to a bank and they would sell you a bancassurance product or a time deposit.
So what is the best among these options?
Financial mentors say there is no such thing as a single best investment – only “appropriate” ones. The word “best’ is relative for each individual. How do we figure out if the investment we choose is appropriate? Registered Financial Planner Randell Tiongson recommends this 4-point guide in deciding where to put our money.
- Investment objective – What is the investment for? Is it for retirement? Educational fund? Capital for business? An investment should provide a solution for a specific financial goal.
- Time Frame – When will you need it? Is it for short-term (less than 1 year), mid-term (2-7 years), or long-term (more than 7 years). It would not be wise to put money on a 10-year corporate bond if you would be needing your money within 2 years. On the other hand, you wouldn’t be maximizing the earning potential of your money if you put your retirement fund, which you would be needing after 20 years, in a time deposit. Stock investing might be a better option.
- Risk tolerance – each individual have distinct tolerance for risks. You could be conservative, moderate or aggressive. If you get nervous with market fluctuations, stock and mutual fund investing might not be suited for you.
- Investment acumen – knowledge and understanding of different investment types is also a factor in choosing the best investment. Investments range from simple (time deposit) to the complicated or sophisticated (stocks, mutual funds, etc.). Familiarity with the basic concepts of a chosen investment is really helpful. A wise tip would be: Never invest in something you do not understand.
Before parting with your hard-earned money, always make sure that the investment type or instrument you chose matches your financial need.
Do you have any questions? Feel free to contact me.