Investment
Whether you are looking at investing in a pension, an investment bond or ISA (Individual Savings Account), you might consider using investment funds.
What are Investments?
When planning your finances, it is important to distinguish between savings and investments. Savings are generally funds that you set aside that can be accessed relatively quickly. These savings are often for a specific need or purchase, like a holiday or a new car. The most common way of saving is into a bank account (‘deposit’ account) where the money can be accessed in an emergency, and for every £1 you put in, you will get £1 back and possibly some interest. In other words, the original capital is guaranteed.
Investments are designed to be held for a longer term, usually at least five years. You need to be comfortable with tying up this money for a period and should not consider investments unless you have some savings in place. Most investments are not guaranteed to return your money in full, although do offer the prospect of potentially higher returns than deposit accounts. Returns, risk and volatility are the factors that will determine a suitable place for your investments.
Creating and maintaining the right investment strategy plays a vital role in securing your financial future. Whether you are looking to invest for income, growth, or a combination of the two, we can provide the quality advice, comprehensive investment solutions and ongoing service to help you achieve your financial goals. We arrange bespoke solutions for our clients, providing a tailored one-to-one advisory service, delivered face-to-face or remotely, depending on what suits you.
Investments & risks
All investments carry some element of risk. The value of the fund can fall as well as rise and you may not get back the full amount originally invest.
To enable funds to be able to manage risk, the manager will practice some level of diversification. This works on the premise that holding two different shares is better than two of the same shares. This is because all shares react differently to investment conditions and changes.
Investment Assets
The fund sector identifies the areas in which the fund will invest. This can be based on geographical terms, or in a particular industry. For example, there are funds that only invest in UK companies, or Japanese companies, just as there are funds that invest purely in ‘technology’ companies (IT, telecoms etc). In addition to this, there are sectors that are a mixture of assets. A typical ‘balanced managed’ fund will have some money invested in equities, some in property and some in fixed interest investments or bonds.
Although there are no guarantees as to performance or returns from any sector, our knowledge, experience and insight can indicate how we might expect investments to perform.
Investment Options
There are so many different mediums in which to invest, here we look at a few key areas
Bank Accounts
National Savings & Investments
Bonds & Gilts
Property
Equities (shares)
Investment Funds
Bank Accounts
Current accounts may offer a very low rate of interest (if any) but they are the most flexible in terms of accessing your money. Banks also offer savings accounts with higher interest rates and notice accounts with competitive interest rates, but you may have to give a certain amount of notice before making a withdrawal (60 or 90 days perhaps), or you must agree to invest the money for a set period.
National Savings & Investments
These are generally considered low risk as they are government backed. Many of National Savings products are tax-free.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE NATIONAL SAVINGS & INVESTMENT PRODUCTS
Bonds & Gilts
These are generally considered to be lower risk than direct equities, although the value can still fall as well as rise. Corporate bonds are investments based on business loans offered by private companies and are ‘rated’ based on the ability of the issuer to maintain interest payments and repay the loan. A corporate bond fund will invest in a wide range of these loans. ‘Investment grade’ stock within the bond fund is rated AAA to BBB, whilst stock rated a BB or below is termed ‘junk or non-investment grade’. Some funds also invest in government bonds (known as gilts).
The income yield that is available from fixed income investments varies according to the quality of stock. Lower quality (junk or non-investment grade) stock usually offers a higher yield to attract investors (as they may be otherwise put off by the increased risk/volatility) whilst gilts generally offer much lower returns, they are underwritten by the government and so the risk of default is much reduced.
Property
The long-term historic performance of commercial property has very little correlation with the performance of corporate bond or equity-based investments. For investors looking to diversify their portfolio, property funds have historically offered attractive returns. Income from commercial property funds is often derived from contractually binding contracts of rent paid by business tenants to occupy property. Consequently, leases are often arranged over a long period and generally include an ‘upwards only clause’ which ensures that rents are not negotiated downwards during the lease period, even in times of falling markets.
Added to the rental incomes, property has the added attraction of potentially appreciating in value over time, and although property values do fall, the ‘bricks and mortar’ assets of a fund remain. However, returns from a property fund are not guaranteed and the value of any investment can fall as well as rise.
Furthermore, because of the nature of property as an asset, it may not always be possible to immediately switch or cash in your investment, because the property in the fund may not always be readily saleable. If this is the case, then a fund manager may defer your request to cash in for a period of time. You should bear in mind that the valuation of property is a matter of the valuer’s opinion, rather than a matter of fact.
Equities (shares)
Over the long-term, equities have historically offered better returns for investors. Although this is not a guide to the future, it is felt that the increased risk of investing in company shares can potentially be rewarded by investment returns in excess of those available from traditional deposit accounts. However, there are no guarantees.
Investment Funds
Specialist investment managers will often manage a fund (a pool of investments) that invests in one or more of the above categories, the aim being to diversify the risk across a spread of equities, bonds, or both. There are hundreds of investment funds available, each with their own specific aims and objectives. Investment funds can also specialise in one particular sector, such as only investing in companies that are listed on the FTSE 100 index, or only investing in construction and mining companies. There are also funds that invest geographically, perhaps only buying shares in Japanese or American companies. Each sector has its own unique characteristics, and your adviser will be able to explain more about this.
All these types of investment are available through your financial adviser. You may be able to include your investment within a tax-efficient product such as an ISA (Individual Savings Account) or a pension. There is a vast array of products available, and choosing the most suitable one can be difficult, your adviser will be able to help you decide which are suitable for you.
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