An investment vehicle refers to a product or financial structure that enables investors to invest money in assets like stocks, bonds, commodities etc. There are many types of investment vehicles like mutual funds, ETFs, structured investment vehicles (SIVs) etc. that serve specific investment purposes. For example, SIVs allow banks to transfer risk off their balance sheets while earning fees from investors. On the flip side, weak governance makes SIVs susceptible to losses when asset values decline. Overall, investment vehicles let investors implement sophisticated investment strategies to achieve their financial goals.
Structured investment vehicles help transfer risks off bank balance sheets
SIVs or structured investment vehicles are entities that banks create to buy income-generating assets like loans, mortgages etc. Banks transfer these assets off their balance sheets into SIVs to reduce regulatory capital requirements. SIVs use short-term loans to fund purchases of these assets. They earn profits from the spread between the higher yield of the assets and lower cost of loans. However, this leverage also amplifies losses when asset values decline. Many SIVs failed in the 2008 financial crisis when the mortgage assets they held faced defaults.
Investment vehicles cater to specific investor needs
There are many types of investment vehicles available to meet different requirements of investors: 1) Mutual funds provide easy diversification for retail investors. They allow small investments across multiple assets. 2) ETFs or exchange traded funds also offer diversified exposure for investors to buy/sell easily on exchanges. 3) Structured products use derivatives to provide customized payoffs for specific market views.
Weak governance makes investment vehicles prone to losses
While investment vehicles can help implement sophisticated strategies, poor governance can expose investors to losses. For example, investment banks designed flawed SIV structures with inadequate risk controls that imploded in 2008. Retail investors also suffer due to high expense ratios of some mutual funds that erode returns. Thus oversight from regulators is essential to align investor-manager incentives.
Investment vehicles evolve to tap specific investor demand
Product innovation continually expands the investment vehicle universe to cater to evolving investor requirements: 1) Low-cost index funds and ETFs are gaining popularity among retail investors looking to minimize costs. 2) Private equity firms have developed VC and growth vehicles targeting startups with high growth prospects.
Choose investment vehicle per risk appetite and return need
In conclusion, investment vehicles enable investors to invest as per their desired risk-return profile. Conservative investors can opt for relatively safe vehicles like bond funds while those willing to tolerate more risk can explore alternatives like private equity. As needs evolve, more vehicles get created like crypto funds today to meet specialist demand.
Investment vehicles are structures that help investors achieve specific investment objectives by providing customized exposure to asset classes. While vehicles like SIVs carry high risks, others like index funds help minimize costs. Investors can choose vehicles aligned to their risk appetite and return expectations.