Investment Guide

Cash

Cash investments increase in value by earning interest at a fixed or variable rate.

Cash investments include:

• bank and building society accounts
• national savings accounts
• other interest paying accounts

In cash investment funds your money is invested with potentially millions of pounds from other investors to get the best interest rates.

Benefits

Cash investments offer:

• security — the risks to your capital are minimal
• easy access to your money, although it may be tied in by a notice period or a fixed term
• a clear, interest rate based return

Risks

If your interest rate is lower than the rate of inflation, the buying power of your money will go down.

For example, if you have an interest rate of 1.5% and the annual rate of inflation is 4%, your savings will lose value by just under 2.5% each year — though the actual amount will still increase. On a £10,000 investment, that's a loss of almost £250 buying power a year.

Bonds

Bonds are also known as fixed interest securities — they can be bought for a set term, and they pay out interest at a fixed rate. There are two main types:

• gilts — issued by the Government or local authorities
• corporate bonds — issued by companies

Bonds allow the bond issuer to raise funds by borrowing money from the public. In return for the loan, they make regular payments at a fixed rate of interest. These payments are called coupon payments.

You don't have access to your money during the period of the term, although bonds can be traded on the stock market. When the term ends, the bond issuer repays the original amount — known as the par value.

Unit-linked bond funds

You can invest in bonds directly or via unit-linked bond funds, when your money is pooled with that of thousands of other investors.

This allows fund managers to invest in bonds from a wider range of companies, which can reduce the risk to your money, but also reduce its potential growth. If one company performs particularly badly or well, the effect is offset by the rest of the fund, which reduces the impact.

Benefits

• Bonds provide a regular income, potentially higher than that from a bank or building society account.
• A skilful fund manager can achieve a higher rate of growth than the average bond, or reduce the impact of a falling market by buying or selling at the right time.
• If you have invested in a corporate bond and the company is wound up, it must repay its bondholders before its shareholders. The same applies to interest payments.
• In general, bonds are lower risk than equities.

Risks

Bonds are affected by two main risk factors:

• credit risks
• interest rate risks

Credit risks

The risk to your money depends on the credit worthiness of the issuer. If a company is stable and financially secure, it's more likely to be able to repay your loan, meaning less risk and a lower interest rate.

Low-risk companies are known as investment grade. Bonds issued by less secure companies are known as non-investment grade, or junk bonds.

UK Government bonds are considered to be virtually risk-free because the Government could increase taxes in order to repay the loan. Bonds issued by other governments may carry more risks.

Interest rate risks

When the Bank of England changes interest rates, your bond will be more or less valuable depending on the direction of the changes made.

If interest rates become higher than the rate of your coupon payments, your money is earning less than it would if it was in a bank, where it is also more secure. This cuts the value of your bond, because nobody will buy it from you unless it's sold for less than its original value.

Property

A direct property investment is one way to make money from bricks and mortar. This means buying a property to live in, let out or develop and sell on. Alternatively, you could invest in a property fund.

How do property funds work?

A property fund pools investors' money. It can involve investing in land, commercial properties such as offices, shops and factories or property development.

The return you get depends on changes in market value to the properties held by the fund, and any rental income.

Benefits

A direct property investment gives you:

• an asset that you can use while it increases in value
• the reassurance of a physical investment
• security — property is less risky than investing in equities
• income potential through rental payments

A property fund offers you:

• the chance to invest across a variety of properties
• the experience of a fund manager
• reduced risk — by investing in a large number of properties, the impact of a single property (for example an empty rental property) is less significant.

Risks

All property investments are subject to changes within the property market. A downturn could bring a shortage of buyers or mean the property is worth less than what you paid for it originally.

Exchange rates can also affect the value of overseas properties and any decline in the rental market can lead to a lack of suitable tenants to cover mortgage repayments.

Investing in property directly has potential problems, including:

• a costly initial outlay — including stamp duty, legal costs, rates, surveyor fees and any renovations
• high ongoing maintenance costs

Property fund investments also have unique risks:

• property can take years to sell delaying the return on your investment
• some funds are unregulated, which means investors have less protection

Equities

Investing in equities, also known as shares, stocks or securities, means buying shares in individual companies or investing in an equity fund.

An equity fund allows you to pool your money with potentially thousands of other investors and the Fund Manager buys shares across a variety of companies and sectors, making it less risky than investing in an individual company.

Equity investments pay out a share of a company's profits. This payment, usually made annually, is called a dividend. The greater the company profit, the larger the dividend.

Benefits

• Part-ownership of a company, without the need to get involved in the business.
• The value of your investment may increase if the company is successful.
• An annual income as long as the company remains in profit.
• Compared to cash, bonds or property this is a long-term, high-performance investment, although there's also a higher risk factor.

Risks

• The size of dividends is variable and payment is not guaranteed.
• Poor company performance, interest rates and a negative economic outlook can reduce share value.
• If a company goes out of business, shareholders are the last to be paid and may get nothing back.

There is the added risk with equity funds that the return depends on the fund manager making the right decisions.