The products or instruments that investors use to generate investment returns are called investment vehicles. Investors are able to choose between several asset classes, however, even if an investor chooses the same asset class they might use a different investment vehicle.
In this article, we will analyze in detail what is an investment vehicle, and the different types of investment vehicles.
What is an investment vehicle?
An investment vehicle is a means to invest money and earn a profit. In finance terminology, it may refer to any financial security that produces income for an investor.
Institutional and retail investors can choose from a wide range of investment vehicles available. Depending on investment goals, investors can invest their capital in assets, cash, or funds to generate desired profits.
An investment vehicle is an instrument where investors:
- Can invest capital
- Earn profits
- Generate income
- Buy or sell
How can investment vehicles be categorized?
Investment vehicles can be categorized in several ways, depending on different factors. Here are some of the possible characteristics of investment vehicles:
- Private or public
- Active or passive
- Direct or indirect
- Short, medium, or long term (investment horizon)
Public investment vehicles
Investment vehicles can be categorized depending if they are public or private. Public investment vehicles include possible investments that are widely available to the general public.
This includes:
- Individual stocks
- ETFs
- Bonds
- Mutual funds
- Real estate
Everyone is able to invest in public investment vehicles, although it requires you to have a brokerage account. Private investment vehicles, on the other hand, are not accessible to everyone.
Private investment vehicles
A private investment vehicle is not accessible to every investor, and therefore it is considered private. Here are some of the most common private investment vehicles:
- Hedge funds
- Venture capital
- Angel investments
- Private equity
- Real estate partnerships
Private investment vehicles may require investors to have either a certain amount of capital or a certain level of knowledge to be able to invest in them. This includes being an accredited or sophisticated investor.
Active investment vehicles
Active investment vehicles are characterized by not having any manager overseeing the investment, therefore the investor will have to control its own investments. These investments are usually conducted by seasoned investors who can invest individually.
They require the investor to manage every single part of the investment process, from researching to actually investing. Active investment vehicles include investing in:
- Individual stocks
- Private business acquisitions
- Real estate
- Bonds
- Derivatives
Passive investment vehicles
Passive investment vehicles differ from the public because they have a professional manager overseeing the investment. This usually includes ETFs, funds, hedge funds, and any investment vehicle where the investor does not have to make direct investment decisions.
Direct investment vehicles
Active and passive investment vehicles are also directly related to direct and indirect investments. Direct investments will include stocks, bonds, or any asset that an individual investor invests in.
Direct investment vehicles mean that the investor is directly allocating capital to a certain asset, as opposed to indirect investment vehicles. This means that the investment portfolio will have direct exposure to a certain asset.
Indirect investment vehicles
An indirect investment vehicle means that investors will get exposure to certain assets in an indirect way. These include ETFs and mutual funds for example. They also tend to be passive investment vehicles where there is a designated portfolio manager that runs the whole investment portfolio.
Investment horizon
Investment vehicles are also characterized by their own investment horizon, whether it is short-term, medium-term or long-term. Different investments will fall upon one of these investment horizons, and it is crucial to know exactly how to choose the investment vehicle that suits your investment horizon in the best way possible.
For instance, individual investors may look for long-term and fixed-income investment products like bonds. Similarly, speculators may look for aggressive, high risk and short-term investment products like options.
Depending on the risk tolerance, investment profile, and investment horizon, different investment vehicles could be used in order to achieve different financial goals.
What are the 4 main types of investment vehicles?
Broadly, we can categorize investment vehicles into 4 categories. These categories can be defined depending upon the risk, expected returns, maturity term, and types of financial securities.
Cash and cash equivalents
These are investment instruments that involve hard cash or cash equivalents (highly liquid assets). Common examples include:
- Bank saving accounts
- Money market funds
Debt investment vehicles
These financial instruments earn interest on debts offered to their customers. Common examples of debt or lending investment vehicles include:
- Corporate bonds
- Government bonds
- Certificates of deposit (CDs)
- P2P Lending
Equity investment vehicles
These are assets or financial instruments owned by investors. Investors may generate income through these investment vehicles, or they may appreciate in price and generate profits.
Some examples of equity investment vehicles include:
- Stocks, real estate
- Derivatives
- Cryptocurrencies, commodities, and precious metals.
Pooled Investment Vehicles
These are purposefully arranged investments where multiple investors join hands to share profits and capital requirements. Common examples of these instruments include hedge funds, mutual funds, pension funds, and so on.
What are examples of the main investment vehicles?
As mentioned above, we can categorize investment vehicles in several ways. Investors can earn profits through equity, debt, and cash investment types.
Here are some of the main investment vehicles available for both individual and institutional investors:
- Saving accounts
- Certificate of deposits (CDs)
- Money market funds
- Stocks
- Derivatives such as Options, Futures, FRAs, etc.
- Corporate bonds
- Treasury bonds
- Municipal bonds
- Preferred shares
- Convertible bonds
- Warrants
- Mutual funds
- Pension funds
- Hedge funds
- ETFs
- Commodities like oil, gold, silver, etc.
- Real estate
- Private businesses
- Intangible assets like cryptocurrencies
Which is the Best Investment Vehicle?
The best investment vehicle depends on the individual investor. Investors have different risk profiles, and therefore they might invest using different vehicles that better suit their investment goals, and risk profile.
Thus, the choice of the best investment vehicle will vary by investor preferences. For instance, an aggressive and risk-tolerant investor would call stocks the best investment vehicles.
Contrarily, a retired individual investor looking for small but consistent returns would call bonds, mutual funds, or dividend stocks. It would choose only the safest investment vehicles.
What are the main short-term investment vehicles?
Short-term investments come with a maturity period of less than one year. Therefore, any financial instrument or investment that has a maturity period of one year or less can be defined as a short-term investment vehicle.
Common examples of short-term investment vehicles include:
- Saving accounts
- Money market accounts
- Stocks and stock derivatives
- Short-term bonds
Certain investments can be sold at any time. For instance, investors can sell stocks, bonds, derivatives, and other assets at any time. Therefore they tend to be the most common choice, due to their increased liquidity.
Getting exposure with different investment vehicles
Stocks are an asset class, and in order to get exposure to them, you can use different investment vehicles, such as ETFs and mutual funds. Investment vehicles allow you to invest in different asset classes in totally different ways.
This way you can choose the investment vehicles that better suit your goals, and use that to your advantage.
Is cryptocurrency a type of investment vehicle?
By definition, cryptocurrencies are intangible currencies. However, these can be considered investment vehicles. Therefore, we can classify cryptocurrencies like Bitcoin and Ethereum for example as a special type of investment vehicle.
Is real estate an investment vehicle?
Both Real estate property and real estate exchange-traded funds (REITs) are investment instruments. Both types of real estate investments can be traded by individual and institutional investors. Therefore, we can categorize real estate as an investment vehicle as well.
Conclusion
As we have seen there are plenty of investment vehicles to choose from, and each investor can choose what suits them best. One of the advantages of knowing the different investment vehicles is that you can build a portfolio that combines different investment vehicles.
According to your financial goals, risk tolerance, and work you want to put towards your investments.
Image source: MB