Despite the fact that the banks' and building societies'
deposit accounts are safe, they have suffered severely
as interest rates drop.
Investors who are willing to take slightly more risk with
their money can potentially achieve better returns over
the longer term than if their money was left on deposit
without having to go as far as taking the higher risk
of investing in individual companies where the value of
your shares can vary from day to day.
There are many thousands of different investments opportunities
available in the UK, and many more in Europe and throughout
the world, and you must decide what level of risk you
are willing to take, whether you need income from the
investment, your tax situation and the number of years
that you are prepared to invest.
If you have a lump sum of money available, it is sensible
to put some of this spare cash in a deposit account with
easy access to give flexibility and to cope with any unexpected
expenses. However, you should research which accounts
are paying the highest interest without requiring an extended
notice period to draw cash or limiting the amounts that
can be taken withdrawn.
It is generally believed that only investing in deposit
accounts from the likes of banks and building societies
means that your money is not likely to grow faster than
the rate of inflation which, in turn, means that the value
of your savings actually reduces, in real terms.
If you are interested in investing in shares, most insurance
and fund management companies provide collective investment
schemes, where you in effect add your money to other people's
investments so you are can have a spread of investments
over a greater number of shares, thereby reducing your
risk.
It is always sensible to use the tax efficiency of ISAs
with your investments, wherever they are placed, which
offers a maximum savings amount of £7,000 per annum
per person without tax being payable on the profits from
the investment. However, it should always be remembered
that high possibility of growth is always accompanied
by an equally high risk and investments can go down as
well as up, as many people found in the period from 2000
to 2002.
For a greater degree of safety, you should consider with
profits bonds where your money is invested in the company's
with profits fund that will invest spread its investment
between shares, fixed interest stock, gilts and property.
The spread of investments means that the risks inherent
in certain investments is mollified as was seen in 2000
to 2002 where stocks and shares, interest on savings on
deposit were steady but low and the value of property
soared. Companies in this market tend to keep some profit
made when growth is high to increase the return in years
when profits are lower, so protecting the investor from
the erratic changes in share prices.
Bonds rely on the strength of the company issuing them
and its ability to pay bonuses so the company with whom
you invest should be strong enough to cover you when growth
is low without reducing the bonuses.
One of the benefits of bonds and ISAs is that you can
cash in your investment at any time but don't forget that
you could get back less than you put in so it is normally
recommended that you leave this form of investment in
place for at least five years. However, the taxation rules
vary between bonds and ISAs and it is important to understand
that surrender penalties could be applied to certain forms
of investment.
If you are more interested in the unit-trust market, there
are a number of investment bonds available which offer
access to a range of unit-linked funds which invest in
many different areas such as shares, property, stocks
and gilts. Like the with profits investments, your money
will be added to other investors cash but you are able
to choose the funds in which you invest the risk that
you are prepared to take.
You can select UK funds or European funds or invest in
a managed fund that can invest for you in a mixture of
funds through the bond or you can also choose a combination
of a fixed rate deposit accounts and unit-linked investments,
which are basically invested in shares.
There are many forms of "trusts" such as Unit
Trusts, Open Ended Investment Companies (sometimes referred
to as OEICs) and Investment Trusts. With these, you invest
in a fund run by a management company and your investment
is combined with other investors' money and used to buy
a wide selection of investments. Trust funds may also
give you access to investments to which individual investors
may not normally have access. All trusts have rules that
govern their investment policies and the levels of risk
that they may take and it is important to select the right
one for you.
It is the fund manager's job to decide which investments
to buy and sell and when to take this action, hence increasing
the profit and balancing the risk. Also fund managers
have had access to information on market movements which
may not be available to individual investors.
Government bonds, often referred to as Gilt-edged securities,
offer a low risk buts, as you might expect, so are the
potential profits. Gilts are loans made to the Government
which then pays you a fixed income, either annually or
twice a year. The maturity date of Gilts are short-term,
meaning five years or less, medium- term, between five
and fifteen years or long-term, 15 years or more. On the
maturity date, the gilts are redeemed and the Government
pays the original issuing price of the stock to the holder.
Gilts have a fixed interest rate, so when interest rates
rise, the capital value of the Gilt falls and visa versa
so there is the potential you can make a capital gain
(or loss) if you sell before the fixed maturity date depending
on interest rates, the popularity of the specific Gilt
and the term left to run. Corporate bonds work in the
same way as Gilts but they are issued by companies rather
than the Government. They are essentially a company's
promise to pay you an income for borrowing your money.
They generally pay more than Gilts because there is more
of a risk with your money as companies can go bankrupt
but there is a great deal more security with the Government.
Bonds issued by financially strong companies are known
as investment grade bonds and the highest rating is AAA.
The risk with these bonds is at the minimum whereas bonds
offered by smaller companies whose credit rating is not
high will offer higher returns to reflect the higher risk.
You can also invest in non-UK companies, which are issued
in foreign currencies. This increases your risk still
further because the value of the currency in which the
bonds are issued will go up and down against sterling.
However bond prices are much less volatile than shares
so the risk is lower. A Zero (or Zero Dividend Preference
Share) does not given any income, hence the name but they
pay out to their holders a predetermined fixed capital
amount on a set day. This date is usually after about
5 years or so. These shares are normally split capital
investment trusts. When an investment trust that issues
Zeros comes to its end date, Zeros are usually entitled
to the first payout before other shareholders. There is
still a large of risk because Zeros may not pay out the
anticipated capital. Recent events have also shown the
potential high risk nature of their underlying investment.
Guaranteed Income Bonds warrant to give you your money
back at the end of the term and in the meantime will pay
you a fixed income or interest. There is no potential
for capital growth and the rate offered will change in
line with interest rates which will not then change, irrespective
of what happens to interest rates so check them against
other available interest rates to ensure they are competitive.
However, if you do not pay tax, Guaranteed Income Bonds
are usually not recommended as tax is deducted from the
interest and cannot be reclaimed.
For those paying higher rates of tax, Guaranteed Income
Bonds have the attraction that the interest is only taxed
at the base level and will not be grossed up as it does
with ordinary deposit accounts.
Equity or Stock Market Bonds offer a fixed rate of income
or growth over a given term. Your capital is normally
returned in full as long as the stock market performs
in a stated way but the terms and conditions vary from
bond to bond. Some run for two or three years, others
for five or longer. Some are linked to the FT-SE 100 (the
footsie), and others to the Dow Jones, the NASDAQ, the
Nikkei in Japan or a combination of these.
The higher the fixed rate on offer, the tougher the requirement
for the index to perform and the greater the likelihood
that capital may not be returned in full. There is often
a clause stating that, even if the index has fallen by
a certain amount by the end of the term, you will not
lose any money. But once it goes beyond that stated amount
net, you can lose a percentage of your capital.
If markets are low when your bond matures you risk losing
your capital, as you do not have a chance to continue
with your investment until stock markets recover.
In essence, therefore, there is plenty of choice for you
to invest your money and increase your income, even at
a time when the Base Rate is low but the very large number
of products around makes it difficult to decide which
ones will suit you best.
That is where we can help as your Independent Financial
Adviser helping you through the maze of products and helping
you to decide which investment is right for you.
We will also read and make you aware of the dreaded small
print that comes with many of these investments and help
you decide what level of risk you should be taking with
your money.
