Understanding Different Investment Vehicles: Stocks, Bonds, Mutual Funds, and More | IV Capital (2024)

FAQs

What are the five types of investment vehicles? ›

A mutual fund provides diversification through exposure to a multitude of stocks. The reason that owning shares in a mutual fund is recommended over owning a single stock is that an individual stock carries more risk than a mutual fund. This type of risk is known as unsystematic risk.

A pooled investment vehicle is an entity—often referred to as a fund—that an adviser creates to pool money from multiple investors. Each investor makes an investment in the fund by purchasing an interest in the fund entity, and the adviser uses that money to make investments on behalf of the fund.

An investment vehicle is a product used by investors to gain positive returns. Investment vehicles can be low risk, such as certificates of deposit (CDs) or bonds, or they can carry a greater degree of risk, such as stocks, options, and futures.

Bonds, stocks, mutual funds and exchange-traded funds, or ETFs, are four basic types of investment options.

Mutual funds are actively managed and traded at the Net Asset Value (NAV) at the end of the day, while ETFs are passively managed, tracking indices and can be traded throughout the day like stocks. ETFs generally have lower expense ratios, better liquidity, and are more tax-efficient compared to mutual funds.

Mutual funds diversify investments, reducing risk, but also limit potential gains. Mutual funds are managed by professionals, reducing the need for monitoring, but investors give up control. Stocks offer higher returns but come with higher risk and volatility.

Risk: The issuer of the bond is required to make regular interest payments to bondholders. In the event of insolvency, bondholders are given first priority for repayment. As a result, there will be no risk of principal if you retain until maturity. Mutual funds are high-risk investment vehicles.

Stocks are more appropriate for investors who can monitor their portfolios and the stock market for opportunities. Mutual funds are more suitable for investors who want a fund manager to do all of the work for them. Bernat summarizes what investors should consider before choosing the right approach for their portfolio.

Is an ETF an investment vehicle? ›

Exchange-traded funds, or ETFs, are pooled investment vehicles that offer exposure to a particular area of the market.

The most common investment vehicles are exchange-traded funds, mutual funds, bonds, stocks, certificates of deposit, and annuities. Each of these has its own advantages and disadvantages.

Stocks vs. bonds. The biggest difference between stocks and bonds is that stocks give you a small portion of a company, whereas bonds let you loan a company or government money.

Bonds – also known as fixed income instruments – are used by governments or companies to raise money by borrowing from investors. Bonds are typically issued to raise funds for specific projects. In return, the bond issuer promises to pay back the investment, with interest, over a certain period of time.

The commonest types of collective investment vehicle are unit trusts (called mutual funds in the US and most other countries), investment trusts (more accurately called investment companies outside the UK), exchange traded funds, OEICs, and REITs.

Some venture capitalists also invest in leveraged buyouts (LBOs). This usually involves investing in a management team with the goal of assisting an established private firm to grow to sufficient size and profitability so a public market sale of equity can occur.

To be clear, an asset class and an investment vehicle are not the same thing. An asset class is a broad category of investments and securities with similar characteristics. An investment vehicle is a means for investing in a particular asset class. For example, an ETF can enable you to invest in bonds.