Types of Investment Structures You Should Know (1)

An investment structure simply talks about how your investments are legally owned. Here are some of the different forms they exist in.

At this point, you will already know that there are different kinds of investments and essentially different vehicles through which you can achieve your different investment objectives.

In the same vein, there are also different ways to invest in these various classes of assets. For example, when investing in stocks, you can choose to select, purchase and manage the stocks yourself either through a stockbroker or online but you might also do so through a mutual fund where you pay a fee to have a professional carry this out for you.

This is basically what investment structures are about. An investment structure simply talks about how your investments are legally owned. These legal entities could be individual investors like you and I, partnerships, companies or even trusts.

If you’re not conversant with the investment world, then it is best to assess the different investment structures that exist before carrying out your investment. The following are some of the key investment structures you should know.

Direct Ownership

The first is, of course, direct ownership of your investment. In an investment like real estate, it could mean that you own the real estate assets directly.

It could also mean that you invest in the stock market on an individual basis and without any collective structure in place. This is the most common investment structure available, as you would expect.

Mutual Funds

Another common investment structure is what is known as a mutual fund. As the name implies, it represent a fund that is pooled together by a group of investors who have the same goal or a mutual objective.

The way this works is that investors come together to purchase shares or units in a fund, and the money is invested by a professional portfolio manager.

Funds are usually either spread across a portfolio of investments towards a collective investment mandate like investment growth or fixed on a specific class of asset like agricultural funds or real estate funds.

Index Funds

There are also funds known as index funds where individuals invest in an index. A stock index is a measurement of a section of the stock market that is generally computed using the prices of selected stocks.

Investors and financial managers alike use it to describe the state of the stock market specifically as a tool for comparison and bench-marking. An example of this fund in the Us is the S&P 500.

While this type of fund is not very common in Nigeria, the idea of this fund is to give investors returns that are in line with such indexes. In other words, if the index is making a certain level of return, by investing in it, you get the same kind of returns.

Just like mutual funds, these funds can be spread across different classes or industries. They could also be divided into small stocks with lower market capitalization (small-cap stocks as they are popularly called) and large-cap stocks.

In our next post, we will review other investment structures and how you can use them to meet your investment objectives.

Written by Lawretta Egba.