The five main asset classes are:

• cash
• fixed interest
• property
• alternatives
• shares.

There are many differences between these asset classes, including:

• they will pay different levels of income
• they may grow or fall in value
• some are easier to turn into cash
• they have different levels of risk.

Cash

When we discuss cash investments, we aren't talking about the cash in your wallet or purse. Cash investments are investments on the short-term money market – like six-month term deposits.

With cash investments you are taking next to no risk. They do pay interest like a term deposit, but because there's minimal risk, the return will be lower. Cash investments have good liquidity, which means they can be cashed in easily.

This asset class poses low risk, but only provides a low return. As a result, your returns may only just stay ahead of inflation. Cash is useful in a portfolio if money is needed quickly.

Fixed interest

These are longer-term loans than cash, with periods ranging from one year up to ten and even thirty years. The interest to be paid is fixed at the start – hence the term fixed interest investments. Usually the money is lent to governments (Commonwealth, State, and Local) or to companies.

The interest from a fixed interest investment will be higher than from cash, because money is being lent for a longer period. The interest rate will depend mainly on what investors think future interest rates will be, as well as on the credit risk – the chance that the borrower would not pay the interest or capital back at the end of the term. Loans to companies are generally more risky than loans to governments, so the company may have to pay a higher interest rate.

Fixed interest investments are useful to hold in an investment portfolio, because they pay a steady return and can be cashed quite easily if necessary.

Property

Property investments are investments in land and the facilities on it. These can include offices, shopping centres, hotels and resorts, industrial premises, or farms. The returns from these investments are paid in the form of rental payments and capital growth. You may also be able to claim a tax deduction for the depreciation of the building and fittings.

Residential property investments are often held directly. Buying and selling property is expensive, and there are many costs to consider, including stamp duty, loan costs, valuation, and agent's fees. It also takes time to buy and sell a property. However, direct ownership gives you full control over the property.

Another way to invest in property is to pool your money with other investors. Rather than concentrate your investment in one or a few properties, you can use a property fund. In this instance, a fund manager buys and manages a portfolio of properties on your behalf. Some of these property funds can be traded on the sharemarket, so it is much easier to sell them for cash, than to sell a property.

Property is usually a long-term investment. It is a useful asset to hold in an investment portfolio, because the rental payments will provide a steady income and there's potential for capital growth. High capital growth may be achieved where the property is in demand because of special features, for example, prestige offices, shopping centres in residential growth corridors, or industrial sites near major transport routes.

Property investments are not free from risk. If the property is not let, there will be no rent paid, which will affect the flow of income. In addition, the value of properties can fall dramatically, particularly in the short term. Property investments are more risky than fixed interest investments.

Shares

Buying shares means you have part ownership of a company and will share in the success (or loss) of the business. Most share investments are in companies listed on sharemarkets, where it's relatively easy to buy and sell shares and information about company activities is readily available.

The returns from shares are paid to the investor in the form of dividends (a share of the company's profits paid to shareholders) and in growth in the share price. Investors in Australian companies may receive a tax credit on their dividends for tax the company has paid on its profits.

Investors can hold shares directly or indirectly. Buying and selling shares is not as expensive as buying property, but it does take time and expertise to research, select, monitor, and manage a share portfolio.

Another way to invest in shares is to pool your money with other investors in a share fund. This is where an investment professional buys and manages a portfolio of shares. These funds can be cashed in easily and payment is based on the current value of the shares on the sharemarket.

Investments in shares are usually long-term investments. They are useful assets to hold in an investment portfolio because dividends provide income and there is potential for capital growth that is in excess of inflation. The share price of successful companies can grow in spectacular fashion.

Shares are the riskiest asset class. Dividends cannot be guaranteed as they depend on the profitability of the company. Share prices can fall just as spectacularly as they can rise. However, over the long term quality share investments frequently outperform other asset classes.

Alternative assets

There is an increasing trend among super funds to diversify away from growth assets made up entirely of investments in the largest companies in the sharemarket, as this kind of exposure can concentrate risk.

A more popular move is one towards a diversified growth model, where large listed companies still represent the majority of exposure, but are combined with alternative strategies and assets.

These types of investments are called alternatives, because they are not invested in the traditional defensive asset classes of cash and fixed interest, and growth asset classes of property and shares. Defensive asset classes are generally considered to offer a low risk of delivering a negative return, but in turn usually earn lower returns, while growth assets are considered to be higher risk with a greater possibility of delivering higher returns.

Alternative assets, which include investments such as infrastructure (e.g. roads, railways, and airports), private equity, hedge funds, and commodities, sit in a kind of middle ground, containing characteristics of both growth and defensive assets. The introduction of alternative assets was approved by the QSuper Board of Trustees, because they offer significant diversification benefits given their attractive risk/return profile.

QSuper's investment manager, QIC, has undertaken research that indicates diversifying into these new types of investments will achieve solid returns with less risk. Alternative assets may produce lower returns in boom markets, but have the potential to produce higher returns in down markets, which in the long term may mean a smoother ride for your super and reinforces QSuper’s commitment to solid returns.