The financial investment instruments are contracts that grant their holders the right to receive a future return, depending on the performance of an underlying asset.
In this article we will explain what financial investment instruments are, what types exist and how they are classified.
What are financial investment instruments?
Financial investment instruments are documents that represent a contractual relationship between two parties: the issuer and the investor.
The issuer is the entity that creates the financial instrument and offers it to the market in order to obtain financing. The investor is the person who acquires the financial instrument and expects to obtain a return.
Financial investment instruments are based on an underlying asset, which is the good or right that determines the value and performance of the instrument. The underlying asset may be real in nature (such as a stock, commodity, property, etc.) or financial (such as a debt, index, currency, etc.).
These instruments allow investors to diversify their portfolioThese instruments allow investors to diversify their portfolio, access markets and assets that they would not otherwise be able to, and take advantage of opportunities offered by changes in the prices of the underlying assets.
What types of financial investment instruments are there?
Financial investment instruments can be classified according to different criteria, such as the type of return, the degree of risk, the maturity, the type of underlying asset, etc.
The following are some of the most common types:
According to the type of profitability
A distinction can be made between fixed-income and equity instruments.
Fixed income instruments are those that offer a predetermined and constant return, regardless of the behavior of the underlying asset. Examples are bonds, bills, promissory notes, etc.
Equity instruments are those that offer a variable return dependent on the performance of the underlying asset. Examples are equities, mutual funds, ETFs, etc.
According to the degree of risk
A distinction can be made between low-risk, moderate-risk and high-risk instruments.
Low-risk instruments are those that have a very low probability of generating losses, but also a very low return. Examples include bank deposits, savings accounts, government bonds, etc.
Moderate-risk instruments are those that have an average probability of generating losses, but also an average return. Examples are corporate bonds, commingled funds, index ETFs, etc.
High-risk instruments are those that have a high probability of generating losses, but also a high return. Examples include stocks, equity funds, derivatives, etc.
According to maturity date
A distinction can be made between short-term, medium-term and long-term instruments.
Short-term instruments are those with a maturity of less than one year, which are used to cover liquidity needs. Examples include bills of exchange, promissory notes, demand deposits, etc.
Medium-term instruments are those with a maturity between one and five years, which are used to obtain a moderate return. Examples include bonds, mutual funds, ETFs, etc.
Long-term instruments are those with a maturity of more than five years, which are used to obtain a high return. Some examples are stocks, pension funds, life insurance, etc.
According to the type of underlying asset
A distinction can be made between direct and indirect instruments.
Direct instruments are those that represent an interest or ownership in the underlying asset. Examples include stocks, bonds, commodities, etc.
Indirect instruments are those that represent a right or obligation on the underlying asset. Examples are derivatives, mutual funds, ETFs, etc.
Description of some of the types of financial instruments
- CETESFederal Treasury Certificates (Certificados de la Tesorería de la Federación), which are debt instruments issued by the Mexican government, with terms of 28, 91, 182 and 364 days. They offer a fixed and constant yield, and are low risk.
- Government bondsThese are debt instruments issued by state or federal governments, with terms of 5, 10, 20 and 30 years. They offer periodic interest payments and are low risk.
- Bank Promissory NotesThese are debt instruments issued by financial institutions, with terms of 30, 60 or 90 days. They offer a fixed and constant yield, and are protected by the IPAB.
- Corporate bondsThey are debt instruments issued by private companies, with varying maturities depending on the issuer. They offer periodic interest payments and are of moderate risk.
- SharesThey are equity instruments that represent an interest or ownership in a company. They offer a variable return dependent on the company’s performance and are high risk.
- ETFsThese are exchange-traded funds that track the performance of an index, a basket of assets or a sector. They offer a variable return depending on the underlying asset, and are of moderate or high risk, depending on the type of ETF.
- Investment fundA mutual fund is an instrument that pools the money of several investors and invests it in different assets, such as stocks, bonds, commodities, etc. It offers a variable return depending on the fund’s strategy, and is of moderate or high risk, depending on the type of fund.
- Fibers or TrustsThese are instruments that invest in real estate, such as offices, shopping malls, hotels, etc. They offer a variable return, dependent on the real estate market, and are of moderate risk.
How can I invest in mutual funds?
To invest in mutual funds, you must follow these steps:
- Define your investor profileYou should know your income level, your objectives, your time horizon, your risk tolerance and your preferences. This will help you choose the type of fund that best suits you, whether it is fixed income, equity, mixed, indexed, etc.
- Search for information on available fundsYou can consult the websites of the fund managers, banks, investment platforms, etc. investment platforms or online comparators. You should look at aspects such as historical performance, volatility, commissions, level of risk, underlying asset, etc.
- Contract the fund you are interested inYou can do this through a financial advisor, by telephone, online or at a bank branch. You should carefully read the prospectus and the fund contract, and verify that you meet the minimum investment requirements.
- Monitor your investmentOnce you have subscribed to the fund, you should follow its performance and periodically review the performance reports sent to you by the fund manager. You can also modify your investment if your circumstances or expectations change.
