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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be taken withdrawn.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 an element of risk because
Zeros may not pay out the anticipated capital amount but you
can check the likelihood of a Zero not paying out. However,
since their inception, none have failed to pay out the predetermined
capital amount on the day.
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.
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