10 Types of Investments in Australia: A Comprehensive Guide

Annuities

Annuities are a form of insurance that provide a guaranteed income stream for a specific period or for life. In Australia, the returns on annuities can vary depending on the type (fixed or variable) and the length of the term. Fixed annuities provide a guaranteed income for a set period or for life, with the return typically between 3-5% per annum.

Variable annuities, on the other hand, offer returns based on the performance of underlying investments, which can fluctuate.

Annuities have become increasingly popular as a way to provide financial security in retirement, with the Australian annuity market growing steadily. According to ASIC, annuities offered by major providers like AMP and MLC have shown returns of 4-6% annually, depending on the type.

Types of Annuities:

• Fixed Annuities: These provide guaranteed income for a set period or for life, based on a fixed interest rate.

• Variable Annuities: Returns are linked to the performance of underlying assets like stocks, providing higher potential returns but with greater risk.

• Lifetime Annuities: These annuities provide a guaranteed income for the lifetime of the investor, providing peace of mind in retirement.

• Term Certain Annuities: These annuities pay income for a specific term, such as 5 or 10 years.

Top Australian annuity providers include AMP, MLC, and AIA Australia. AMP’s Fixed Term Annuity offers a guaranteed return of 4.5% per annum for a 5-year term, while MLC’s Lifetime Annuity provides guaranteed income for life, with returns typically between 4-5%, depending on the investor’s age and investment amount.

Real Estate Investment Trusts (REITs)

REITs offer investors the ability to invest in property without needing to buy physical real estate. They have been a solid performer in the Australian market, with a 10-year average return of 8-9% per annum. The Australian REIT sector has experienced significant growth due to strong demand for commercial and industrial property. As of 2023, Australian REITs represent over $50 billion in market capitalization, with the sector growing steadily despite periodic market downturns.

According to research by Mercer, the average return for Australian REITs in 2022 was 11.5%, largely driven by strong rental yields and capital gains in the industrial property segment.

Types of REITs:

• Equity REITs: These REITs own and manage income-producing properties, such as office buildings, shopping centers, and residential complexes. Investors benefit from rental income and capital appreciation.

• Mortgage REITs: Instead of owning property, mortgage REITs invest in property loans or mortgage-backed securities, earning income through interest payments.

• Hybrid REITs: These REITs combine the features of both equity and mortgage REITs, offering a blend of property ownership and lending exposure.

• Specialty REITs: These REITs focus on specific types of property, such as healthcare facilities, student housing, or data centers.

Some of the top-performing REITs in Australia include Scentre Group (SCG), which specializes in retail properties, and Goodman Group (GMG), which focuses on industrial real estate.

Scentre Group’s return over the past year was 15%, driven by high retail property demand. Goodman Group also posted impressive returns of 20% as industrial property prices surged.

Equity Shares

Australian shares have performed relatively well over the long term. For instance, a $10,000 investment in Australian shares in 1992 would have grown to approximately $131,413 by 2022, reflecting an average return of 9.8% per annum. This outperformed Australian bonds (6% p.a.) and cash (4.4% p.a.)​

Types of Equity Shares:

• Ordinary Shares (Common Stock): These are the most common type of shares issued by companies. Shareholders have voting rights in company decisions and can receive dividends, though dividends are not guaranteed. These shares are traded on the stock exchange and typically offer capital appreciation over time.

• Preference Shares: These shares provide shareholders with priority over ordinary shareholders in the payment of dividends and upon liquidation of the company. However, preference shareholders usually do not have voting rights. They may be fixed or participating in nature.

• Convertible Shares: These shares can be converted into ordinary shares under certain conditions. They offer flexibility for shareholders to benefit from capital growth if the company performs well.

• Non-Voting Shares: These shares do not carry voting rights, but they may offer higher dividends or priority in liquidation. They are often used to maintain control within the founding or management group while still raising capital.

• Restricted Shares: Typically issued to company employees or insiders, restricted shares cannot be sold or traded until a certain period or condition is met.

Macquarie Group (MQG) recently posted a +35.72% return, while JB Hi-Fi (JBH) saw a remarkable +84.53% return. Vanguard’s analysis shows Australian shares delivered a 9.8% annual return over the past 30 years, second only to U.S. shares, which returned 11.7% per annum.

Term Deposits

Term deposits in Australia have long been a popular choice for conservative investors seeking a low-risk, predictable return on their capital. As of 2023, the average return for a 12-month term deposit in Australia is around 4-5%, which has risen in response to recent interest rate hikes. This return is typically fixed for the term of the deposit, providing stability and certainty for investors.

While the returns from term deposits are lower than those offered by equities or property, they are often preferred by risk-averse investors or those nearing retirement who want to protect their capital.

According to the Australian Bureau of Statistics, the value of term deposits in Australia grew by 6% over the past year, as investors sought safe havens amid economic uncertainty.

Types of Term Deposits:

• Fixed-Term Deposits: These deposits lock in a fixed interest rate for a specific period, typically ranging from 1 month to 5 years. The interest rate remains unchanged, regardless of market conditions.

• Variable-Term Deposits: Unlike fixed-term deposits, these offer interest rates that may change over time, depending on market conditions. They offer more flexibility but come with greater uncertainty.

• Online Term Deposits: Many banks offer higher interest rates for term deposits held online, as they typically incur lower operational costs. These deposits can often be set up easily and quickly via digital platforms.

• Bumper Term Deposits: Some banks offer “bumper” or bonus interest rates if certain conditions are met, such as depositing larger sums or maintaining the investment for a longer period.

Australia’s leading banks, including Commonwealth Bank, ANZ, Westpac, and NAB, all offer competitive term deposit products. For example, Commonwealth Bank recently advertised a 5.5% interest rate on a 12-month term deposit, while ANZ offers similar rates for its longer-term deposits.

These products are widely considered safe and provide investors with a guaranteed return over the term of the investment.

High-Interest Savings Accounts

High-interest savings accounts (HISAs) have seen a resurgence in popularity due to rising interest rates in 2023. Currently, the best rates for online HISAs range from 4.5% to 5% per annum, significantly higher than the rates offered in recent years. Despite offering lower returns than stocks or property, HISAs provide investors with a liquid and risk-free investment option.

In 2023, according to Finder, the average HISA return was 4.8%, a notable increase from the previous year’s average of 1.2%. HISAs are an attractive option for short-term savings goals, offering flexibility, liquidity, and safety. However, they generally fail to match the growth potential of higher-risk investments in the long run.

Types of High-Interest Savings Accounts:

• Online Savings Accounts: These accounts typically offer the highest interest rates, as they are offered by online-only banks that have lower operating costs than traditional banks.

• Introductory Rate Savings Accounts: These accounts offer a high interest rate for the first few months, after which the rate drops to a standard, lower rate. They are ideal for savers looking to benefit from an initial boost.

• Bonus Saver Accounts: These accounts provide bonus interest if certain criteria are met, such as making regular deposits or not withdrawing money for a certain period.

• No-Notice Accounts: These accounts offer high interest rates and no withdrawal restrictions but may require notice before withdrawals are made. They provide a balance of liquidity and return.

Popular financial institutions like ING, UBank, and Ramsay Bank offer some of the best high-interest savings products. For example, ING’s Savings Maximiser account recently offered a rate of 5% for eligible customers, while UBank’s USaver offered an interest rate of 4.9%. These accounts are ideal for savers who want to park their funds securely while earning higher-than-average interest.

Robo-Advisors

Robo-advisors have emerged as a popular investment option in Australia, particularly among younger investors who prefer a hands-off approach to managing their money. These platforms use algorithms to manage investments on behalf of clients, providing low-cost portfolio management.

Robo-advisors in Australia have been consistently delivering returns ranging from 6-9% per annum over the past five years, depending on the investor’s risk profile and the robo-advisor’s strategy.

According to a 2023 study by Investment Trends, the number of Australian investors using robo-advisors grew by 25% in the past year, highlighting their increasing popularity due to their ease of use and cost-effectiveness.

Robo-advisors are also attractive because they offer diversification, automatic rebalancing, and lower fees compared to traditional financial advisors.

Types of Robo-Advisors:

• Automated Investment Portfolios: Robo-advisors typically create portfolios based on an individual’s risk tolerance and investment goals. These portfolios may include a mix of equities, bonds, and ETFs.

• Ethical Robo-Advisors: These robo-advisors focus on socially responsible investing (SRI), ensuring that portfolios align with environmental, social, and governance (ESG) criteria.

• Tax-Optimized Robo-Advisors: Some robo-advisors offer tax-optimized portfolios, minimizing capital gains taxes and maximizing after-tax returns for investors.

Australia’s leading robo-advisors include Stockspot, Spaceship, and Six Park. Stockspot, one of the country’s largest robo-advisors, has delivered an average annual return of 7.8% over the past 5 years. Spaceship, which focuses on younger investors, has also seen strong growth, with returns of around 8.4% over the same period.

Investment Bonds

Investment bonds are a tax-efficient way of investing, where earnings are taxed within the bond rather than by the investor. Over the long term, Australian investment bonds have typically provided annual returns ranging from 6-7%, depending on the investment type and manager.

They are an attractive option for those looking for tax benefits, as earnings within an investment bond are taxed at a concessional rate of 30%.

Investment bonds are ideal for investors with a long-term horizon, as they must be held for at least 10 years to avoid additional tax penalties. This makes them particularly appealing for wealth accumulation over the medium to long term.

Types of Investment Bonds:

• Fixed Interest Bonds: These bonds invest primarily in fixed-income assets like government and corporate bonds, providing stable returns through interest payments.

• Equity-Based Bonds: These bonds are invested in equities or managed funds, offering the potential for higher returns but also increased risk.

• Multi-Asset Bonds: These bonds provide a mix of assets, including equities, bonds, and property, aiming to balance risk and return.

• Single-Asset Bonds: These bonds focus on a single asset class, such as shares or property, allowing for concentrated exposure to specific markets.

Leading providers of investment bonds in Australia include BT Investment Management and MLC Investments. For example, the BT Wholesale Australian Shares Fund has delivered an average return of 9% per annum over the last 5 years. MLC’s Multi-Asset Fund has provided investors with consistent returns of around 7% annually.

Managed Funds

Managed funds have consistently been a popular investment choice for individuals looking for diversified exposure to a range of asset classes. In Australia, managed funds have historically provided solid returns, though these returns can vary significantly depending on the fund’s focus (equities, bonds, or property).

For example, Australian equity-based managed funds have averaged annual returns of around 8-9% over the past decade, closely matching the performance of the Australian stock market.

In recent years, according to Morningstar, the average return for Australian managed funds has been around 5-7%, depending on the asset class and fund manager’s strategy. While past performance is no guarantee of future returns, many managed funds have demonstrated resilience and strong risk-adjusted returns.

Types of Managed Funds:

• Equity Funds: These funds focus primarily on investing in stocks. They can be actively or passively managed, with actively managed funds aiming to outperform the market, while passive funds track an index such as the ASX 200.

• Fixed Income Funds: These funds invest in government and corporate bonds, providing a steady income stream through interest payments. They are often used by investors seeking lower risk and stable returns.

• Balanced Funds: A mix of equity and fixed-income investments, balanced funds aim to provide both growth and income. They typically hold a diversified portfolio, including stocks, bonds, and sometimes alternative assets.

• Property Funds: Managed funds can also focus on real estate investments, providing exposure to residential, commercial, or industrial property sectors.

• Ethical Funds: These funds focus on investments that meet specific ethical, environmental, or social criteria, catering to socially-conscious investors.

Top Australian fund managers such as AMP, Colonial First State, and Vanguard have consistently shown competitive returns. For instance, AMP’s flagship Australian equity fund recently posted a 12-month return of 10.5%, while Vanguard’s Balanced Index Fund has returned an annualized 6.7% over the last 5 years.

These funds are popular for their diversified approach, offering steady returns despite market fluctuations.

Exchange-Traded Funds (ETFs)

ETFs have gained significant traction in Australia, becoming one of the most popular investment vehicles for both retail and institutional investors. As of 2023, the Australian ETF market is worth over $80 billion, reflecting their increasing popularity due to low fees, diversification, and ease of trading.

The average annual return of Australian ETFs has been around 8-10% over the last decade, aligning with the broader Australian equity market’s performance.

A standout example includes the SPDR S&P/ASX 200 Fund (STW), which has consistently outperformed traditional managed funds, providing an average annual return of around 9% over the past 5 years.

Types of ETFs:

• Equity ETFs: These ETFs invest in a broad range of stocks, typically mirroring an index like the ASX 200. They provide investors with easy exposure to the Australian equity market.

• Sector ETFs: Sector-focused ETFs allow investors to target specific industries, such as technology, healthcare, or resources. These can provide higher growth potential but also come with higher risk.

• Bond ETFs: Bond ETFs track portfolios of government or corporate bonds. They offer fixed-income returns and are typically seen as a safer, low-volatility investment.

• Commodity ETFs: These ETFs invest in commodities like gold, silver, or oil. They are popular among investors seeking to hedge against inflation or market volatility.

• International ETFs: For diversification, international ETFs invest in overseas markets, such as the US or emerging markets, providing investors with broader global exposure.

Popular ETF providers in Australia include Vanguard, BlackRock, and BetaShares. Vanguard’s Vanguard Australian Shares Index ETF (VAS) has gained considerable attention, showing consistent returns averaging 10.5% per year since inception. BlackRock’s iShares MSCI World All Cap ETF (IWLD), which focuses on global equities, has provided investors with a solid 8.3% annualized return over the past 5 years.

Bonds (Government and Corporate)

Bonds provide a lower-risk alternative to equities, offering predictable income through interest payments. Government bonds in Australia have yielded an average return of 2.5-3% over the past decade, while corporate bonds can offer higher returns, typically in the range of 4-6%, depending on the issuer’s credit risk.

In recent years, Australian government bonds have faced pressure due to rising interest rates, but they remain an attractive option for conservative investors seeking stability. Corporate bonds have been more volatile but offer the potential for higher yields.

Types of Bonds:

• Government Bonds: These are issued by the Australian government and are considered one of the safest investments. They provide fixed interest payments and are backed by the government’s credit.

• Corporate Bonds: Issued by companies, these bonds typically offer higher interest rates than government bonds. However, they come with higher risk, as the company’s financial health impacts bond payments.

• Municipal Bonds: These are issued by local governments or agencies and finance public projects. They are relatively safe and may offer tax advantages for Australian investors.

• Floating Rate Bonds: These bonds offer interest rates that adjust based on market conditions, providing protection against inflation and interest rate rises.

Leading Australian companies such as Commonwealth Bank and Telstra issue corporate bonds. Commonwealth Bank’s bonds typically offer a 3-4% return, while Telstra’s corporate bonds have a higher yield, often around 5-6%, but with increased risk tied to the telecommunications sector.

Originally Published: https://www.starinvestment.com.au/10-types-of-investments-in-australia/