While regularly siphoning some of your hard earned cash into a savings account is a wise first step on the path to robust personal finances, there’s also a downside worth keeping in mind.

Unfortunately, low interest rates offered by banks are not always enough to keep up with rising inflation, meaning you can see poor returns on your money, if at all.

This is where investments come in.

Investment instruments can provide higher returns although you should be aware, there’s also a risk of losing some or all of your money.

Basic Investment types

Bonds

An investment where a person lends their money to a corporate or government entity to fund projects or pay off debts. The invested money will be held for a definite period at a variable or fixed interest rate.

Rewards: Bonds usually pay higher interest rates than bank deposits and, especially in cases of government issued bonds, the risk of losing your capital is slim to none. However, compared to other investments the returns are not impressive.

Risks: Income from bonds is not immune to market and economic fluctuations affecting gains, and some funds carry redemption fees if you sell your shares early.

Stocks

A type of investment where an investor gets an ownership share of a corporation and part of its earnings.

Rewards: If you look at key Western markets historically, stocks have performed better than bonds – meaning your money is better positioned over the long term to keep up with inflation. Some firms also pay periodic dividends in cash.

Risks: The stock market climate is erratic and you can find your money increasing in value today only to fall hard the next day. Susceptibility to both economic and political (domestic and international) factors can greatly affect earnings. Financial advisors recommend investing long term to better manage the highs and lows.

Mutual funds

An investment composed of pooled funds – to be put in stocks, bonds, money markets etc. – from many investors.

Rewards: The funds are allotted to various investment products, ensuring diversity. The opening amount is mostly affordable allowing low to medium income earners access to investment instruments managed by professionals.

Risks: The earnings are likewise susceptible to the ups and downs in the market. Investment performance can also depend on the expertise of the fund manager’s ability to effectively allocate the money. Also make sure to factor in management and service fees.

Peer to peer lending

A kind of debt financing that allows individuals or companies to borrow or lend money without the involvement of banks or financial institutions.

Rewards: Strong potential for a solid passive income source for lenders because of the attached monthly interest from payment.

Risks: Lending money always comes with associated risk and the prospect of a borrower defaulting on payments is always a possibility.

Crowdfunding

Group of investors pooling their money to fund a project or business in exchange for future profit or shares. Eureeca is the UAE-based platform that cater to this type of investing.

Rewards: Potential to earn good returns if the project turns out to be successful.

Risks: There’s no guarantee the project will take off and you can end up losing money if it flops. It can also take months and even years before you start seeing returns coming in.

Eager to invest? Keep these things in mind…

• Make sure to have an emergency fund worth at least three to six months of your monthly wage before dabbling in investment products.
• Thoroughly study investment products available and don’t invest unless you understand the risks. If it sounds too good to be true, it probably is.
• Know your risk profile. Each investment product is not the same and caters to different types of investor: conservative, moderate and aggressive. If you lose sleep at even the slightest drop in stock prices, then stick to bank deposits or bonds.
• We’ve all heard the investment principle ‘don’t put your eggs in one basket.’ This means putting your money in diverse products – stocks, mutual funds, bonds etc – so you won’t end up losing a huge chunk of your money should one or two deliver a negative return.
• Have a definite plan and strategy. Having an objective will help you set a goal and what your investment strategy will be to achieve it.
• Keep track of your investments. You don’t have to monitor the stock market every hour, even a monthly or quarterly check will do. This will help you decide whether it’s time to move your money to another investment vehicle to maximise gains.
• Realising profits from investments takes time. Most financial experts recommend investing long term.
• Seek the services of a credible financial adviser.

*Disclaimer: This article is intended to provide an introduction to the concept of investing and not to serve as financial advice. You should always do your own independent research and seek the advice of a qualified and reputable financial professional.